r 
ii 

ii 

L 

==———=—=— —              [II 

UNIVERSITY  OF  CALIFORNIA 
AT   LOS  ANGELES              ! 

THE     CITIZEN'S    LIBRARY 


The 
Economics   of  Distribution 


BY 


JOHN   A.    HOBSON 

AUTHOR  OF  "  THE  EVOLUTION  OF  MODERN  CAPITALISM  ' 
"JOHN    RUSKIN,"   "SOCIAL    REFORMERS,"   ETC. 


THE    MACMILLAN   COMPANY 

LONDON  :  MACMILLAN  &  CO.,  Ltd. 
1900 

All  rights  reserved 


COPTRIOHT.   1900, 

By  the  MACMILLAN  COMPANY. 


Nortoooli  ^Brrsa 

J.  S.  CunhinR  &  Co.  —  Berwick  tt  Smith 

Norwood  Mass.  U.S.A. 


4-m 
I'll 


PREFACE. 

This  work  endeavours  to  construct  an  intel- 
ligible, self-consistent  theory  of  Distribution  by- 
means  of  an  analysis  of  those  processes  of  bar- 
gaining through  which  economic  distribution  is 
actually  conducted,  the  results  of  industrial  co- 
operation being  apportioned  to  the  owners  of  the 
factors  of  production  in  the  several  stages  of 
production. 

The  cliief  dilificulty  lies  in  coordinating  the 
different  factors  of  production,  so  as  to  bring  the 
payments  made  respectively  for  the  use  of  land, 
labour,  and  capital  under  a  common  law  of  price, 
and  in  showing  that  the  same  economic  forces 
which  determine  the  market  and  normal  prices 
of  commodities  are  applicable  to  the  sale  of  all 
these  uses  of  the  factors  of  production. 

The  extension  to  all  these  cases  of  the  termi- 
nology and  modes  of  measurement  hitherto  con- 
fined to  land,  or  extended  tentatively  and  by 
analogy  to  certain  other  factors,  involves  a  com- 
plete restatement  of  some  of  the  problems  of 
wages  and  interest.  But  this  unification  of  tlie 
different  processes  of  economic  payment  has  long 


202933 


vi  PREFACE. 

been  felt  to  be  necessary  to  the  construction  of 
a  satisfactory  theory  of  distribution,  and  various 
approaches  in  this  direction  have  been  made. 
This  worli  claims  to  go  farther  and  to  reach  a 
common  law  of  price  applicable  to  every  sort  of 
sale. 

Some  of  the  reasoning  is  difficult  because  it 
involves  a  necessary  abandonment  of  commonly 
accepted  terminology  and  the  establishment  of  a 
new  system  of  economic  notation.  If,  however, 
the  reasoning  is  valid,  it  establishes  certain  im- 
portant theoretic  conclusions,  some  of  which  are 
fraught  with  large  implications  in  the  direction 
of  progressive  politics. 

In  particular,  it  claims  to  prove  that  all  pro- 
cesses of  bargaining  and  competition,  by  which 
prices  are  attained  and  the  distribution  of  wealth 
achieved,  are  affected  by  certain  elements  of  force 
which  assign  "forced  gains"  and  other  elements 
of  "  economic  rent "  to  the  buyers  or  the  sellers. 
There  is  thus  established  the  existence  of  a  large 
fund,  partaking  of  the  nature  of  those  monopoly 
and  differential  rents,  long  ago  recognised  in  the 
case  of  land,  which  furnish  no  stimulus  to  volun- 
tary industrial  energy,  and  which  can  be  taken 
for  public  service  by  taxation  without  injury  to 
industry. 

Much  of  the  material  of  this  work  was  given 
in  the  form  of  lectures  to  students  of  the  London 
School  of  Economics  and  Political  Science  in  1897, 


PREFACE.  vii 

and  parts  of  several  chapters  have  appeared  in  the 
Harvard  Quarterly  Journal  of  Economics.  Since 
receiving  the  first  proofs  of  this  book,  a  little 
volume  has  come  into  my  hands,  entitled  "The 
Theory  of  Wages,"  by  Mr.  H.  M.  Thompson, 
which  works  out  independently  some  of  the  main 
points  of  my  criticism  of  current  theories,  in  par- 
ticular of  the  fundamentally  erroneous  doctrine 
that  "  Rent  does  not  enter  into  the  Expenses  of 
Production. " 

JOHN  A.  HOBSON. 


CONTENTS. 

CHAPTKB  PAOK 

I.    The  Determination  of  a  Market-price        .        .        1 
II.    Producer's  and  Consumer's  Rents      ...      41 

III.  The  Determination  of  Long-period  Prices  and 

of  Value        ......         .55 

IV.  The  Law  of  Rent  as  the  Basis  of  Coordination 

of  the  Factors  of  Production        .        ,        .113 

V.     The  Grading  of  Labour  and  Capital.    Marginal 

and  Differential  Payments    ....     160 

VI.  The  Coordination  of  the  Factors  of  Production. 
Effects  on  the  Theory  of  Price  and  Distri- 
bution   ........     193 

Vn.    Bargains  for  the  Sale  of  Labour-power       .        .    218 

ViU.     Bargains  for  the  Use  of  Capital  .        .        .    227 

IX.     Bohm-Bawerk's  Positive  Theory  of  Capital       .     266 

X.     The  Theory  of  Surplus  Value  —  Its  Influence 

upon  Distribution 295 


THE  ECONOMICS  OF  DISTEIBUTION. 

CHAPTER   I. 

THE  DETERMINATION   OP  A  MARKET-PRICE. 

§  1.  "I  am  unaware  of  any  rule  of  justice  appli- 
cable to  the  problem  of  distributing  the  produce  of 
industry,"  wrote  Professor  J.  E.  Cairnes,  and  it  is 
common  to  find  in  modern  economic  treatises  gen- 
eral expressions  of  dissatisfaction  with  existing 
methods  of  apportioning  wealth  among  those  who 
have  contributed  to  its  production.  But  there  is 
little  agreement  as  to  the  nature  of  the  defects  in 
present  modes  of  distribution,  nor  does  the  analysis 
of  economic  processes  commonly  adopted  by  those 
who  indulge  in  these  expressions  of  dissatisfaction 
fully  justify  any  such  general  condemnation.  The 
economic  power  of  landowners,  the  establishment 
of  trade  monopolies  or  combinations,  the  weakness 
of  poorer  classes  of  labourers  in  bargaining  with 
employers,  are  commonly  regarded  as  defects  of 
the  existing  industrial  order.  But  the  recognition 
of  these  defects  is  quite  consistent  with  a  convic- 
tion that  the  general  and  normal  tendency  of  com- 
petitive industry  makes  for  a  fair  and  satisfactory 


2  THE   ECONOMICS    OF   DISTRIBUTION. 

distribution  of  the  fruits  of  industry.  For  the 
specific  defects  named  above  are  seen  to  be  closely- 
associated  with  restraints  of  competition,  and  may 
plausibly  be  regarded  as  exceptions  which  by  no 
means  justify  a  general  condemnation  of  the  justice 
or  utility  of  a  system  of  distribution  based  upon 
freedom  of  competition. 

§  2.  In  order  to  test  the  character  of  distri- 
bution fairly,  we  must  study  it  under  normal 
not  under  exceptional  circumstances,  and  in  its 
constituent  acts.  Distribution  is  composed  of,  or 
achieved  by,  transactions  which,  for  lack  of  any 
better  term,  we  call  bargains.  Much  investiga- 
tion has  taken  place  of  certain  classes  of  bargains, 
particularly  in  reference  to  sales  of  the  use  of  the 
factors  of  production,  and  special  laws  of  rent, 
wages,  interest,  have  been  founded  upon  these 
studies.  The  general  effect  of  these  studies 
among  earlier  economists  was  to  break  up  the 
unity  of  industry:  first,  by  suggesting  that  bar- 
gains for  the  use  of  land,  of  capital,  and  of  labour- 
power  were  subject  to  radically  different  laws  ; 
secondly,  by  failure  to  relate  these  laws  of  the 
value  or  the  price  of  the  factors  of  production  to 
the  laws  which  were  found  to  determine  the  price 
of  the  commodities  which  they  contributed  to 
produce.  More  recent  economic  writers  have 
made  considerable  advances  toward  the  integra- 
tion or  unification  of  a  theory  of  Distribution,  by 
relating  the  theories  of  determining  the  price  of 


DETERMINATION  OF  A  MARKET-PRICE.        3 

the  several  factors  through  an  extension  of  the 
law  of  differential  rents,  and  by  a  scientific  formu- 
lation of  a  theory  of  value  which  is  applicable  to 
the  determination  of  all  prices,  alike  of  uses  of 
factors  and  of  commodities. 

But  the  completion  of  this  work  of  unifying 
the  theory  of  Distribution  has  been  delayed  by  a 
refusal  of  economists  to  investigate  sufficiently  the 
nature  of  the  bargain  per  se,  so  as  to  find  what  is 
common  to  its  different  species.  So  far  as  Eng- 
land is  concerned,  this  refusal  is  due  to  a  visible 
reluctance  among  students  to  engage  upon  purely 
deductive  or  speculative  problems,  except  within 
a  certain  narrow  field  of  mathematical  analysis. 
The  dominance  of  the  historical  spirit  on  the  one 
hand,  and  the  rapid  advance  of  specialisation  in 
economic  study  on  the  other,  have  unduly  drawn 
attention  from  the  root-problems  of  deductive 
economics,  which  are  too  often  assumed  to  have 
been  solved,  or  not  to  be  worth  the  trouble  of  solu- 
tion. To  these  influences  I  chiefly  attribute  the 
small  amount  of  intellectual  energy  devoted  to  the 
investigation  of  the  process  of  bargaining  which 
lies  at  the  base  of  the  theory  of  Distribution. 

Such  study  requires  the  moderate  use  of  a  method 
which  is  peculiarly  disfavoured  by  English  econo- 
mists of  the  present  day,  and  is  stigmatised  as 
"Crusoe  economics."  This  recent  revolt  against 
speculations,  which  were  barren  or  illusive  because 
they  commonly  proceeded  from  false  premises,  has 


4  THE  ECONOMICS   OF  DISTRIBUTION. 

gone  too  far.  Such  speculative  analysis,  with  all 
its  dangers,  is  indispensable  to  the  social  sciences. 
The  conditions  of  inductive  reasoning  from  experi- 
ments, which  exist  in  many  branches  of  physical 
science,  are  here  notoriously  lacking,  and  to  sup- 
ply this  defect  a  process  of  fictitious  experiment 
is  substituted,  supposititious  cases  being  framed 
where  unessential  circumstances  are  eliminated,  so 
as  to  enable  us  to  see  more  clearly  the  working  of 
certain  simple  forces. 

To  study  problems  of  price  or  value,  by  plung- 
ing into  the  full  intricacy  of  actual  business,  is  not 
really  a  practical  but  a  most  unpractical  method. 
To  go  back  to  a  thoroughly  uneconomic  condition 
is  usually  unprofitable ;  but  to  take,  first,  cases 
true  to  the  essential  facts  of  life,  though  contained 
in  a  simpler  setting  of  circumstances  than  that  in 
which  they  are  actually  found,  and  afterward  to 
introduce  the  excluded  circumstances  gradually, 
in  order  to  see  what  difference  is  wrought,  —  such 
substitute  for  the  experimental  method  of  the 
physical  sciences  is  both  defensible  and  highly 
profitable  as  a  mode  of  gradual  approach  toward 
a  real  issue.  This  method  I  propose  to  adopt  in 
opening  up  the  nature  of  a  bargain. 

§  3.  Bargains  are  found  commonly  in  clusters  at 
a  market-price,  being  acts  of  sale  or  exchange  at 
this  common  rate.  It  is  therefore  first  essential 
to  understand  how  this  common  price-point  is 
determined. 


DETERMINATION  OF  A   MARKET-PRICE.       5 

If  A  wishes  to  sell  a  horse  and  B  is  the  only 
buyer,  it  is  evident  that,  if  the  highest  price  B 
is  willing  to  give  does  not  reach  the  lowest  point 
A  is  willing  to  take,  there  can  be  no  price  and  no 
sale. 

A  asks  <£20  and  fixes  reserve  at  <£15. 

B  offers  £8  and  fixes  reserve  at  X12. 

A's  offers,  20  19  18  17  16  15 


B's  offers,  12  11  10  9  8 

Next  suppose  A  willing  to  take  .£15,  while  B 
is  willing  to  give  <£18.  If  a  sale  takes  place,  the 
price  will  obviously  lie  in  the  common  ground  be- 
tween <£18  and  £15.  But  at  what  point  and  how 
is  the  point  reached  ?  Professor  Hadley  assumes 
that  a  point  will  be  reached  and  thinks  it  is  deter- 
mined by  "relative  skill  in  bargaining."^ 

A,  20  19  18  17  16  15 


B,  18  17  16  15  14  13  12  11  10  9  8 

But  this  attainment  of  a  price  by  "skill  of  bar- 
gaining" implies  ignorance  of  each  other's  mind 
in  the  case  of  A  and  B,  or  either.  If  A  knows 
or  thinks  that  B  will  go  to  £18  and  B  does  not 
know  that  A  will  sell  at  £15,  A  will  stand  firm 
at  £18  and  get  that  price ;  if,  per  contra,  B  knows 
that  A  will  sell  at  £15  and  A  does  not  know  that 
^  Hadley's  Economies',  p.  73. 


G  THE  ECONOMICS    OF  DISTRIBUTION. 

B  will  go  to  X18,  B  gets  his  horse  at  .£15.  If 
neither  knows  but  each  suspects  the  other  will  go 
further,  "bluff"  is  the  determinant;  the  bidding 
proceeds  until  either  A  or  B  believes  that  any- 
further  demand  will  outstep  the  limit  set  by  the 
other  in  his  mind  and  will  lose  him  the  bargain. 
The  determinant  here  is  superior  cunning,  or,  as 
Hadley  says,  "  skill  in  bargaining."  Or  it  may 
be  that  while  A  is  willing  to  sell  at  £15,  he  may 
know  or  suspect  that  it  is  more  important  for  B 
to  obtain  the  horse  than  for  him  to  sell,  in  which 
case  he  is  in  the  position  to  extort  <£18. 

So  far  we  have  no  element  of  competition  :  the 
process  by  which  a  price  is  reached,  if  it  is  reached, 
is  one  of  bargaining  from  beginning  to  end. 

Now  introduce  the  competitive  element  upon 
one  side  of  the  transaction.  A,  the  happy  owner 
of  the  horse,  which  he  will  sell  for  X15  or  as  much 
more  as  he  can  get,  is  faced  by  B  and  C,  who  both 
want  the  horse  and  are  furnished  with  effective 
demand  in  the  shape  of  cash.  Now  B  and  C 
either  set  the  same  limit-price  upon  A's  horse,  or 
they  set  a  different  limit-price.  If  it  is  equally 
important  to  both  to  get  the  horse,  and  they  are 
possessed  of  equal  pecuniary  resources,  they  may 
conceivably  be  both  willing  to  bid  up  to  .£18  for 
the  horse.  In  such  a  case  it  is  a  matter  of  absolute 
indifference  to  A  whether,  after  making  B  and  C 
bid  against  each  other  up  to  .£18,  he  sells  to  B  or 
to  C.     Indeed,  the  casuist  would   rightly  argue 


DETERMINATION   OF  A   MARKET-PRICE.       7 

that,  since  he  could  not  sell  to  both,  and  there 
was  no  more  reason  why  he  should  sell  to  one 
rather  than  to  the  other,  he  could  not  sell  at  all ; 
but  would  stand  like  the  Ass  of  the  Fable,  who 
starved  to  death  as  he  stood  at  an  equal  distance 
from  two  equally  attractive  bundles  of  hay.  But 
elbowing  aside  our  casuist  and  allowing  A  to  effect 
a  sale  at  X18  to  either  B  or  C,  guided  by  some 
personal  preference  or  the  prospects  of  future 
business  with  the  respective  parties,  it  is  plain 
that  the  competition  between  B  and  C  has  simply 
placed  A  in  the  same  position  of  bargaining  supe- 
riority as  he  would  occupy  in  dealing  with  B  alone, 
on  the  assumption  that  he  knew  the  limit-price  B 
had  set  himself,  while  B  did  not  know  his  limit- 
price.  The  actual  price  reached  would  assign  to 
A  the  whole  gain  of  the  bargain,  less  the  mini- 
mum required  to  compensate  B  or  C  for  the 
trouble  of  bargaining. 

But  the  chance  of  B  and  C  fixing  the  same  price- 
limit  and  adhering  to  it  with  equal  persistency  is 
infinitely  small.  In  the  actual  business  world  we 
may  take  it  that  the  two  competitors  fix  a  different 
price-limit,  — 

A,  20  19  18  17  16  15 

B,  19  18  17  16  15  14 

C,  18  17  16  15  14 

B's  limit  is  £19,  and  C  will  not  go  beyond  £18. 
Here  it  will  be  evident  that  competition  does  not 


8  THE  ECONOMICS   OF  BISTBIBUTION. 

fix  the  price-point,  but  only  a  lower  limit  of  price. 
The  price  actually  reached  cannot  be  less  than  £18, 
because  B  and  C  will  bid  against  each  other  up  to 
that  point.  It  may  be  anywhere  between  <£18  and 
X19  ;  and  the  actual  point  will  be  determined,  not 
by  competition,  but  by  those  same  forces  of  skill 
and  force  in  bargaining  which  operated  in  the 
earlier  case. 

§  4.  Now  arises  the  question  :  Is  the  method  of 
determining  a  price  essentially  different  when  we 
place  upon  both  sides  of  the  transaction  a  number 
of  genuine  competitors,  in  other  words,  when  we 
institute  a  free  market  ? 

What  is  the  determination  of  a  market-price? 
It  is  curious  to  observe  how  the  text-books  of 
English  economists  have,  almost  without  excep- 
tion, shirked  or  slighted  this  practical  question, 
hurrying  the  reader  to  the  more  abstract  con- 
sideration of  a  normal  price,  and  contented,  as 
was  Mill,  to  explain  any  particular  divergence  of 
market-price  from  normal  price  by  vague  refer- 
ence to  temporary  fluctuations  in  supply  and 
demand,  which  kept  market-prices  oscillating 
round  a  normal  price,  giving  the  advantage  now 
to  sellers,  now  to  buyers. ^ 

It  has  generally  been  considered  a  satisfactory 
account  to  say  that  the  comj)etition  between  own- 
ers of   supply  on    the    one    hand    and    exercisers 

1  J.  S.  Mill,  Principles  of  Political  Economy,  Bk.  Ill, 
Ch.  II,  §  4. 


DETERMINATION   OF  A  MARKET-PRICE.       9 

of  demand  on  the  other  hand  will  equalise  sup- 
ply and  demand  at  some  point  of  price.  This  is 
Mill's  contribution  toward  the  theory  of  a  market- 
price,!  and  it  may  be  said  to  be  generally  received 
in  English  economic  text-books  as  a  sufficient 
description  of  a  market-price.  Professor  Mar- 
shall, in  discussing  the  price  of  the  corn  market, 
finds  it  to  be  such  as  would  "  exactly  equate  sup- 
ply and  demand.  "2  Professor  Hadley,  in  his 
recent  book,  is  content  to  say  that  "  the  market- 
price  of  an  article  under  the  modern  commercial 
system  is  the  price  at  which  the  demand  is  equal 
to  the  supply." 

Now  such  a  statement  is  doubly  unsatisfactory. 
It  neither  defines  a  market-price  nor  explains  how 
a  market-price  is  actually  reached.  It  furnishes 
no  real  answer  to  the  question  of  the  celebrated 
Oxford  Professor  who  was  reported  to  stop  his 
friends  in  the  street  in  order  to  ask  them  why  a 
silk  hat  cost  20s.  The  text-book  answer  to  this 
question  consists  in  showing  that  the  price  of  a 
silk  hat  cannot  be  21s.,  because  in  that  case  sup- 
ply would  be  in  excess  of  demand,  there  would  be 
too  many  hats  and  too  few  people  to  buy  them, 
and  the  competition  of  sellers  would  reduce  prices; 
conversely,  the  price  could  not  be  19s.,  therefore 
20s.  is  presented  as  a  point  of  convergence  be- 
tween two  opposing  prices  which  reach  at  that 

1  Cf.  Dissertations  and  Discussions,  Vol.  IV  ("  Thornton  "). 
^Frinciples  (i!d  ed.,  p.  392). 


10  THE  ECONOMICS   OF  DISTRIBUTION. 

point  a  temporary  equilibrium.      The   supply  of 
hats  was  equal  to  the  demand  at  20s. 

This  statement  that  a  market-price  is  one  that 
equalises  supply  and  demand  explains  nothing. 
What  we  want  to  know  is  why  this  equilibrium 
occurs  at  20s.  English  economists  have  com- 
monly shirked  the  direct  significance  of  this  ques- 
tion, which  requires  an  investigation  of  the  actual 
process  of  equilibration  in  a  market,  and  have 
either  betaken  themselves  to  an  examination  of 
the  costs  or  utilities  which  lie  behind  demand 
and  supply,  or  to  the  logomachy  regarding  the 
meaning  of  these  terms  themselves.  It  is  indeed 
too  true  that  some  economists  have  so  used  the 
terms  "demand "  and  "  supply  "  as  to  beg  the  ques- 
tion of  an  equilibration.  "  We  desire,"  says 
Cairnes,  "  to  know  the  circumstances  which  deter- 
mine price;  and  we  are  told  that  the  selling  price 
is  always  such  that  the  quantity  of  a  commodity 
purchased  in  a  given  market  is  equal  to  the  quan- 
tity sold  in  that  market."  ^ 

1  Leading  Principles,  p.  113.  Caimes,  however,  is  wrong  in 
imputing  this  fault  of  reasoning  to  J.  S.  Mill,  though  the  latter, 
in  the  passages  in  which  he  expressly  defines  demand,  is  ill- 
advised  in  his  language.  In  the  formal  definition  (Bk.  Ill, 
Ch.  II,  par.  ,3)  he  identifies  demand  with  "  quantity  demanded." 
Unfortunately  the  expression  might  mean  "quantity  bought," 
or  it  might  mean  "quantity  which  buyers  would  be  willing  and 
able  to  buy  at  a  given  price."  In  a  second  passage  (Bk.  Ill, 
Ch.  XVIII,  par.  2)  demand  is  held  to  mean  "the  quantity  of 
it  (com)n(iditics)  which  can  find  a  purchaser,"  an  expression 
involved  in  the  same  ambiguity,  for  it  might  be  held  that  only 


DETERMINATION   OF  A    MARKET-PRICE.     11 

Where  demand  is  equivalent  to  quantity  de- 
manded in  the  sense  of  quantity  bought,  and  sup- 
ply to  quantity  supplied  or  sold,  it  is  evident  that 
the  boasted  Law  of  Supply  and  Demand  becomes 
nothing  else  than  an  identical  proposition. 

But  while  Cairnes  was  right  in  insisting  upon 
the  need  of  an  exact  explanation  of  the  process  by 
which  supply  and  demand  are  equilibrated  in  a 
price,  he  was  himself  unable  to  throw  any  further 
light  upon  the  process  than  to  suggest  that  the 
final  result  depended  upon  "  higgling  of  the 
market," 

§  5.  The  closest  formal  inquiry  into  the  opera- 
tion of  two-sided  competition  in  a  market  is  that 
of  Bohin-Bawerk.  I  propose  here  to  take  his 
illustration  of  the  market  and  to  present  his  rea- 
soning in  what  I  think  is  a  simpler  form  than  that 
found  in  his  book. 

A,  B,  C,  D,  E,  F,  G,  H,  are  sellers  of  horses. 
All  the  horses  are  supposed  to  be  of  the  same 
worth,  and  all  the  sellers  to  have  an  equal  know- 
ledge of  the  market.  They  have,  however,  mini- 
mum or  reserve  prices,  which  vary  from  .£10  in 
the  case  of  A,  to  £26  in  the  case  of  H. 

the  qucantity  actually  sold  "can  find  a  purchaser,"  or  it  might 
include  whatever  quantity  could  be  sold  at  a  price,  assuming  it 
to  be  offered  at  that  price.  Mill's  context  and  general  treat- 
ment of  a  market-price,  however,  makes  it  pretty  clear  that  he 
did  not  mean  by  "  quantity  demanded  "  quantity  actually  sold, 
but  (luautity  which  buyers  were  willing  to  buy  if  they  can  find 
sellers  willing  and  able  to  sell  at  a  price. 


12 


THE  ECONOMICS   OF  DISTRIBUTION. 


I,  J,  K,  L,  M,  N,  O,  P,  Q,  R,  are  buyers  in  the 
market,  with  maximum  prices  which  vary  from 
<£15  in  the  case  of  I  to  <£30  in  the  case  of  R. 


Sellers.     Price-limits. 

H     G     F     E     1)     C     B      A 


25 


80 


I      J     K     L     M     N     O     P     Q      U 

BuTERS.  Price-limits. 
Let  bidding  open  at  £10.  At  this  point  only  1 
will  sell ;  10  would  buy,  and  since  none  will  let 
the  other  have  a  bargain,  they  will  overbid.  At 
,£11  there  are  2  sellers,  but  the  competition  of  10 
buyers  will  not  allow  a  sale  at  that  point,  and  bids 
still  rise  ;  at  .£15  there  are  3  sellers,  but  the  other 
7  will  not  allow  3  of  their  number  to  buy  horses 
at  £15,  tliat  sum  being  less  than  they  would 
consent  to  give.  At  £15  10s.  one  of  the  buyers 
has  dropped  out,  his  limit-price  having  been  ex- 


DETERMINATION  OF  A   MARKET-PRICE.     13 

ceeded,  but  there  are  still  9  buyers  against  3  sell- 
ers ;  these  3  sellers  could  not  fix  a  bargain  with  3 
of  the  buyers  because,  as  they  were  settling  it,  the 
other  6  buyers,  finding  that  they  would  be  left 
in  the  cold,  would  offer  better  terms  and  upset 
the  proposed  bargains.  At  £17  10s.  another 
seller  enters  in,  and  another  buyer  has  dropped 
out,  but  there  are  still  8  buyers  against  4  sellers, 
and  no  bargain  can  be  struck.  After  <£20  is 
passed,  another  seller  will  have  entered,  and  an- 
other buyer  have  fallen  out,  leaving  5  sellers  faced 
by  6  buyers.  This  state  continues  up  to  .£21 .  A 
sale  cannot  take  place,  because  the  would-be  ex- 
cluded buyer,  the  odd  man,  will  fasten  on  to  any 
of  the  5  possible  sales  and  force  up  the  price.  If 
£21  is  passed,  however,  this  inconvenient  odd  man 
drops  out,  leaving  5  sellers  and  5  buyers.  Each 
man  can  make  his  bargain  at  £21  Is.,  for  5  are 
willing  to  sell,  5  to  buy,  at  that  price.  But 
though  5  would  sell  at  £21  Is.,  they  would  rather 
get  more  if  they  can  ;  they  can  get  more,  for  all 
5  buyers  would  sooner  pay  up  to  £22  than  fail  to 
buy  a  horse.  But  if  the  sellers  put  up  the  price 
above  £21  10s.,  a  6th  seller  would  enter  the  field, 
and  there  would  be  6  willing  sellers  against  5  will- 
ing buyers  —  a  state  of  things  which  would  force 
the  price  down  below  £21  10s. 

So  whereas  at  any  point  just  over  £21  10s. 
there  would  be  6  sellers  and  5  buyers,  at  any  point 
just  under  £21  there  would  be  6  buyers  and  5 


14  THE  ECONOMICS   OF  DISTRIBUTION. 

sellers.  In  neither  of  these  conditions  is  a  price 
possible.  On  the  other  hand,  at  any  point  between 
£21  10s.  and  £21  there  are  5  sellers  and  5  buy- 
ers, and  5  sales  can  be  made  satisfactory  to  each 
party.  In  other  words,  supply  and  demand  are 
equalised  between  £21  10s.  and  £21. 

Competition  of  buyers  on  the  one  hand  and 
sellers  on  the  other  hand  has  thus  fixed  rigid 
limits  for  a  market-price. 

But  to  fix  limits  for  a  price  is  not  to  fix  a  price, 
and  curiously  enough  Bohm-Bawerk  leaves  his 
analysis  at  this  interesting  point.  The  bargain  is 
made  possible  at  any  point  between  the  valuation 
of  the  most  capable  of  the  excluded  buyers,  M, 
as  lower  margin,  and  the  most  capable  of  the 
excluded  sellers,  F,  as  upper  margin  ;  but  there  is 
nothing  in  this  analysis  to  show  where  it  will  lie 
between  these  margins.  Indeed,  we  may  say  that 
if  this  were  the  whole  process,  no  price  could  be 
fixed  at  all  and  no  sale  would  be  possible,  at  any 
rate  by  economic  settlement.  The  unerring  logic 
of  competing  self-interest  which  has  found  the 
price-limits  will  not  find  the  price-point  between 
those  limits.  The  comj^etition  which  was  so  effec- 
tive when  6  sellers  faced  5  buyers,  or  5  buyers 
6  sellers,  seems  to  collapse  when  5  buyers  face 
5  sellers,  and  there  is  no  odd  man  to  throw  his 
weight  on  to  an  impending  bargain.  As  far  as 
Bohm-Bawerk's  analysis  is  carried,  there  is  no 
more  reason  for  the  market-price  being  fixed  at 


DETERMINATION  OF  A   MARKET-PRICE.     15 

one  point  between  the  limits  rather  than  at  any 
other  point.  Indeed,  we  appear  to  be  landed  in 
the  same  serious  logical  difficulty  which  encoun- 
tered us  before.  The  5  sellers  would  like  to  get 
a  price  as  near  as  possible  to  ,£21  10s.,  the  5 
buyers  a  price  as  near  as  possible  to  X21 :  here 
we  have  a  real  discrepancy  of  interest  between 
the  parties  and  no  machinery  of  competition  to 
settle  it. 

We  must  plainly  recognise  that  if  the  sellers 
and  the  buyers  in  this  case  were  really  acquainted, 
not  merely  with  the  outward  condition  of  the 
market  but  with  the  subjective  valuations  which 
each  of  them  puts  upon  the  act  of  sale,  no  sale 
could  be  possible  by  economic  means.  If  the 
sellers  can  fix  the  price  near  the  upper  margin, 
the  advantage  of  one  of  the  buyers  is  reduced  to 
a  minimum,  and  the  whole  body  of  sellers  get  the 
best  of  the  bargain  ;  if  the  buyers  can  force  the 
price  to  near  the  lower  margin,  one  seller  has  his 
advantage  reduced  to  a  minimum,  and  the  buyers 
get  the  best  of  the  bargain.  Why  should  either 
party  give  way  ?  There  is  no  economic  method 
of  reaching  a  price-point  here  ;  it  would  be  neces- 
sary either  to  agree  to  split  the  difference  or  to 
"toss-up,"  neither  of  which  can  be  reckoned  an 
economic  settlement.  This,  we  may  take  it,  is 
not  what  would  really  happen,  for  the  subjective 
valuations  of  the  various  buyers  and  sellers  will 
not  be  known  to  one  another.    Although,  in  his 


16  THE  ECONOMICS   OF  DISTRIBUTION. 

elaborate  analysis  of  two-sided  competition,  Bohm- 
Bawerk  does  not  even  indicate  how  the  price- 
point  is  reached,  he  has  hinted  in  an  earlier 
treatment  of  "  one-sided  competition  "  which  ex- 
hibits the  same  difficulty  that  the  price-point  will 
depend  upon  "  skilful  bargaining."  ^  In  other 
words,  the  work  of  competition  is  not  to  find  a 
price,  and  there  is  no  such  thing  as  a  "  competi- 
tion price  " :  competition  stakes  off  a  ring,  within 
which  bargainers  fight  it  out  by  force  and  craft. 
Taking  our  present  instance,  it  seems  essential  to 
the  fixing  of  a  price  that  one  of  the  bargainers 
should  deceive  the  other  as  to  the  real  facts  of 
the  case  (i.e.  as  to  his  subjective  valuation),  lead- 
ing the  other  to  suppose  that  he  will  not  give  way 
any  further.  For  instance,  one  of  the  sellers  will 
conceal  the  fact  that  he  would  be  willing  to  sell  at 
X21,  and  will  hold  out  for  <£21  9s.;  one  of  the 
buyers  believing  him,  and  fearing  to  be  left  out 
in  the  cold,  will  show  his  willingness  to  accept ; 
thus  the  bargaining  at  any  price  below  <£21  9s. 
will  once  more  partake  of  competition,  since  only 
4  sellers  face  5  buyers,  and  the  equation  of  buyers 
and  sellers  is  thus  falsely  placed  at  £21  9s.  By 
such  fraud  or  force  of  superior  bargaining  the 
price-limits  are  drawn  together  so  closely  as  to 
approximate  toward  a  money-point,  and  the  "stand- 
ing out"  of  one  of  the  5  sellers  may  fix  the 
price  for  all  5  sales  at  j621  9s.  Some  such 
^  Pusitivc  Theory  of  Capital,  p.  200. 


DETERMINATION   OF  A   MARKET-PRICE.     17 

practice  of  fraud  or  force  seems  necessary  to 
achieve  a  price-point. 

Now,  turning  to  those  who  have  taken  part  in 
the  process  of  determining  a  market-price,  we 
can  assign  a  different  part  to  several  groups. 

(a)  First  come  the  ineffectual  buyers  and 
sellers  whose  limits  have  been  too  high  and  too 
low  for  them  to  take  part  in  an  actual  sale.  In 
this  group  fall  G  and  H  among  sellers,  I,  J,  K,  and 
L  among  buyers.  The  desires  and  actions  of  these 
persons  have  had  no  influence  whatever  on  the 
market  or  the  price ;  their  absence  would  not 
have  caused  any  difference. 

(6)  Next  come  the  effectual  buyers  and  sellers, 
whose  subjective  limits  lie  above  and  below  the 
limits  within  which  a  price-point  is  fixed,  and 
who,  though  they  take  part  in  the  bidding  of  the 
market,  have  no  direct  influence  upon  the  price. 
These  are  A,  B,  C,  D,  among  sellers,  O,  P,  Q,  R, 
among  buyers. 

((?)  Thirdly  come  those  members  of  the  market 
whose  subjective  valuation  fixes  the  possible  limits 
within  which  5  sellers  would  be  willing  to  sell  and 
5  buyers  to  buy.  Bohm-Bawerk  holds  that  this 
group  should  comprise  E  and  F  among  sellers,  M 
and  N  among  buyers,  for  he  holds  that  the  action 
of  these  two  pairs  fixes  the  upper  and  lower  limits. 
"  The  upper  limit  is  constituted  by  the  valuation 
of  the  last  buyer  who  actually  exchanges  (the 
last  buyer)  and  that  of   the  most  capable  seller 


18  THE  ECONOMICS  OF  DISTRIBUTION. 

excluded  (the  first  excluded  seller),  and  the 
lower  limit  by  the  valuation  of  the  least  capable 
seller  who  actually  effects  a  sale  (the  last  seller) 
and  that  of  the  most  capable  buyer  excluded  (the 
first  excluded  buyer)."  So  we  get,  he  says,  the 
very  simple  formula,  "  The  market-price  is  limited 
and  determined  by  the  subjective  valuation  of  the 
two  marginal  pairs."  ^ 

According  to  this,  the  upper  limit  is  fixed  by 
the  valuation  of  F,  the  first  excluded  seller,  and 
N,  the  last  actual  buyer  :  the  lower  limit  by  the 
valuations  of  M,  the  first  excluded  buyer,  and  E, 
the  last  actual  seller.  But  N's  exact  valuation, 
£22,  neither  fixes  nor  helps  to  fix  the  upper  limit, 
for  if  liis  valuation,  instead  of  £22,  had  been 
<£21  lis.,  it  would  have  made  no  difference. 
Similarly,  E's  valuation  at  <£20  does  not  help  to 
fix  the  lower  limit,  for  if,  instead  of  being  X20, 
it  had  been  <£20  19s.,  it  would  have  made  no 
difference. 

It  seems  therefore  that  the  valuation  of  N  and 
E  had  no  direct  influence  upon  the  limits  which 
•are  determined  directly  and  exclusively  by  the 
valuations  of  M  and  F. 

(c?)  Lastly,  within  the  price-limits  we  have  the 
action  of  one  of  the  effective  competitors  in  assum- 
ing the  attitude  which  draws  the  price  to  a  point. 
There  is,  of  course,  nothing  to  inform  us  which  one 
adopts  this  attitude.  We  will  assume  that  it  is 
1  L.c,  p.  200. 


DETERMINATION  OF  A  MARKET-PRICE.      19 

E,  the  last  actual  seller,  whose  limit-price  is  <£20, 
and  who  perhaps  may  be  considered  the  stiffest 
bargainer  and  the  most  likely  to  hold  out  for  a 
price  just  below  X21  10s.,  which  after  all  will 
give  him  a  less  subjective  gain  than  will  fall  to 
any  of  the  other  sellers  whose  limit  valuation  is 
lower.  Or  else  we  may  suppose  that  N,  whose 
subjective  gain  is  smallest  among  the  buyers, 
makes  the  successful  stand,  and,  cajoling  the  sell- 
ers into  thinking  he  will  not  buy  at  a  price  much 
over  £21,  fixes  the  price  just  above  that  point. 

§  6.  Our  analysis,  if  correct,  yields  information 
upon  two  important  matters :  first,  as  to  the 
method  of  determining  a  price  or  exchange-rate 
in  a  market ;  second,  as  to  the  distribution  of 
gain  arising  from  a  series  of  bargains  at  a  market- 
price. 

As  to  the  method  of  determining  a  price,  it 
proves  (a)  that  competition  does  not  fix  a  price, 
but  only  the  approaches  to  a  price ;  (5)  that 
within  the  limits  a  price-point  is  fixed  by  the 
superior  bargaining  power  of  a  single  buyer  or 
seller. 

As  to  the  distribution  of  advantage  arising  from 
the  series  of  sales  at  a  market-price,  that  is  seen 
to  depend,  first,  on  the  superior  force  or  cunning 
(bargaining  power)  of  one  of  the  buyers  or 
sellers  ;  second,  on  the  differential  A^aluation  of 
the  several  buyers  and  sellers  as  measured  from 
this  price-point. 


20  THE  ECONOMICS   OF  DISTRIBUTION. 

According  to  the  conditions  of  this  market,  a 
far  larger  aggregate  gain  is  obtained  by  the  sellers, 
because  the  market-price,  whether  fixed  near  <£21 
or  near  £21  10s.,  widely  exceeds  the  supposed 
limits  of  several  sellers.  At  X21  price,  the 
aggregate  gain  of  the  buyers  stands  at  <£25, 
whereas  the  gain  of  sellers  stands  at  .£32.  If 
X21  10s.  is  the  price,  the  buyers'  gain  falls  to 
X22  10s.,  and  the  sellers'  rises  to  £34  10s. 

No  provision  evidently  exists,  in  the  process  of 
determining  a  price,  for  an  equal  or  "  fair  "  divi- 
sion of  the  advantage  of  exchange.  In  no  case 
where  a  sale  takes  place  at  the  market-price  will 
the  advantage  to  the  two  parties  effecting  the  sale 
be  equal.  In  every  sale  there  must  be  some  ad- 
vantage to  both  parties,  but  it  will  not  be  equal. 
If  the  price  stands  at  just  under  <£21  10s.,  N,  the 
last  effective  buyer,  will  gain  just  over  10s. ;  while 
E,  the  last  effective  seller,  will  gain  a  little  less 
than  <£1  10s.  Whatever  be  the  actual  arrange- 
ment which  couples  the  respective  buyers  and 
sellers  making  the  5  sales,  no  one  of  these  6  sales 
will  give  an  equal  gain  to  the  two  parties,  though 
to  both  parties  in  each  case  there  must  be  some 
gain, 

§  7.  The  net  result  of  the  investigation  is  to  show 
that  the  gain  which  accrues  to  buyers  and  sellers 
in  a  market  consists  of  two  elements.  First 
there  is  the  difference  between  the  higher  and  the 
lower  limit  of  [)rice,  representing,  in  the  case  taken 


DETEBMINATION   OF  A   MARKET-PRICE.      21 

above,  nearly  XI  in  each  transaction.  Tliis  is 
distributed  according  to  the  force  or  skill  of  the 
strongest  among  the  buyers  or  sellers.  It  is  not 
easy  to  decide  how  this  gain  may  be  most  conven- 
iently described.  Regarded  from  the  standpoint 
of  origin  it  ranks  as  a  "  forced  gain  "  ;  in  so  far 
as  it  denotes  an  advantage  common  to  the  whole 
body  of  buyers  or  sellers  in  the  market,  as  distinct 
from  the  particular  gains  which  accrue  from  dif- 
ferences of  individual  valuation,  it  may  be  spoken 
of  as  a  "specific  gain."  It  will  be  necessary  to 
use  both  these  terms  in  describing  it. 

The  sellers  and  buyers,  whose  valuations  lie 
beyond  the  limits  within  which  the  price  is  fixed, 
take  in  addition  to  the  portion  of  this  specific 
gain  which  may  or  may  not  fall  to  them,  a  diifer- 
ential  gain  which  represents  the  difference  between 
their  individual  valuation  and  the  upper  or  the 
lower  limit,  according  as  they  are  buyer  and  seller. 

For  instance,  on  the  assumption  that  the  market- 
price  was  fixed  at  X21  9s.,  A  would  obtain  a  gain 
of  9s.,  representing  the  "forced"  or  "specific" 
element  as  measured  from  the  lower  limit  of  <£21, 
and  a  gain  of  £11,  representing  the  difference 
between  .£10,  the  least  sum  at  which  he  would 
have  sold,  and  <£21,  the  lowest  price  which  ordi- 
nary competition  rendered  possible. 

Economic  literature  has,  of  course,  made  us  very 
familiar  with  the  idea  of  differential  gains,  classed 
commonly  as  producers'  and  consumers'  rents,  but 


22  THE  ECONOMICS  OF  DISTRIBUTION. 

the  existence  and  nature  of  the  other  element, 
viz.  forced  gain,  which  clearly  emerges  from  the 
analysis  of  market-price,  has  not  received  the 
attention  it  deserves. 

It  may  be  said  to  represent  the  failure  of  com- 
petition, alike  in  theory  and  in  practice,  to  fix  a 
price.  If  the  competition  between  buyers  and 
sellers  were  able  to  determine  a  price-point,  the 
weakest  buyer  and  seller  would  alike  gain  a 
minimum  advantage  from  the  sale,  and  there 
might  be  said  to  be  a  tendency  toward  an  equal 
distribution  of  the  differential  gains  of  the  bargain 
for  the  other  parties.  But  the  fair  field  of  com- 
petition is  seen  to  be  incapable  of  reaching  a 
market-price,  and  gives  way  in  the  last  resort  to 
that  same  arbiter  of  fraud  or  force  that  is  seen  to 
fix  a  price  when  a  single  buyer  is  bargaining  with 
a  single  seller. 

§  8.  In  other  words,  if  the  example  taken  above 
is  a  sound  one,  force  is  the  ultimate  determinant 
of  a  market-price. 

But  is  the  example  sound  ? 

Proceeding  along  our  sliding-scale  of  instances 
from  a  primitive  bargain,  have  we  yet  reached  the 
true  conditions  of  a  modern  market,  and  is  the 
market-price  really  determined  in  the  manner 
above  described  ? 

It  is  evident  that  the  example  does  not  corre- 
spond to  any  actual  or  possible  horse-market. 
It  assumes  that  8  horse-dealers  are  each  offering 


DETERMINATION   OF  A   MARKET-PRICE.     23 

for  sale  a  horse  which  they  all  believe,  and  which 
all  of  the  prosj)ective  buyers  believe,  to  be  of  ex- 
actly equal  quality,  and  that,  this  being  so,  the 
dealers  yet  differ  so  widely  in  their  limit-price 
that  while  one  is  only  willing  to  sell  at  =£26,  an- 
other will  sell  a  horse  he  knows  to  be  of  equal 
worth  at  so  low  a  sum  as  <£10.  An  actual  horse- 
market  will  offer  a  supply  of  horses,  no  two  of 
which  are  estimated  at  the  same  worth  by  buyers 
or  by  sellers,  and  there  will  not  be  any  close  agree- 
ment as  to  that  worth  by  any  two  of  those  taking 
part  in  the  market  ;  neither  will  the  actual  condi- 
tions of  bargaining  be  such  that  each  knows  what 
offers  the  others  are  making,  unless  the  sale  is  of 
the  nature  of  an  auction,  which  really  removes  the 
case  from  a  two-sided  competition  and  places  it 
among  the  one-sided  competitions. 

An  actual  horse-market,  in  which  the  several 
buyers  and  sellers  bargained  with  one  another, 
would  not  in  fact  result  in  the  attainment  of  an 
exact  market-price  for  a  given  quality  of  horse  ; 
the  prices  actually  paid  not  merely  would  fail  to 
distribute  equally  the  subjective  gains  of  the  bar- 
gains, but  there  would  not  be  the  objective  equal- 
ity afforded  by  our  theoretic  instance  of  equal 
money  prices  for  equal  "value."  The  individual 
craft  of  bargaining,  the  acts  of  concealment  and 
of  bluff,  would,  in  fact,  play  a  larger  part  than  in 
our  case.  Taking  the  aggregate  gains  of  a  series 
of  bargains  in  such  a  market,  the  differential  ele- 


24  THE  ECONOMICS   OF  DISTRIBUTION, 

ment  would  be  much  smaller  than  in  the  theoretic 
case,  and  the  "  forced  gain  "  much  larger. 

Bohm-Bawerk  makes  his  differential  gains  de- 
pendent upon  subjective  valuations.  In  the  case 
of  horse-markets  this  is  specious,  at  any  rate,  so 
far  as  buyers  are  concerned.  But  in  ordinary 
trade  markets,  where  the  buyers  buy  to  sell  again, 
an  objective  basis  of  differential  gains  must  exist. 
A  can  only  value  the  same  goods  at  20%  more 
than  B,  because  he  enjoys  some  trading  or  manu- 
facturing advantage  (objective)  which  enables 
him  to  put  what  he  has  bought  to  a  larger  pro- 
ductive use. 

But  these  practical  considerations  do  not  appear 
to  me  to  invalidate  the  general  correctness  or  to 
destroy  the  serviceable  results  of  the  analysis. 
Our  example  has  legitimately  excluded  minor  con- 
flicting circumstances  ;  all  the  material  facts  have 
been  set  in  a  clearer  atmosphere,  which  enables  us 
rightly  to  detect  the  real  nature  of  the  bargaining 
process. 

§  9.  But  there  is  one  circumstance  in  the  se- 
lected example  which  it  is  important  to  discuss. 
A  horse-dealer  must  sell  a  whole  horse  at  a  time, 
and  the  buyer  cannot  buy  less  than  a  whole  horse. 
In  other  words,  the  separate  units  of  supply  are 
dumped  down  into  the  market  within  distinct  and 
fairly  wide  intervals  of  valuation  between  the  sev- 
eral units.  The  last  horse  that  is  sold  differs  from 
the  first  horse  that  is  not  sold  by  a  definite  consid- 


DETERMINATION   OF  A   MARKET-PRICE.     25 

erable  sum,  no  less  than  30s.  Now  if,  instead  of  8 
horses  valued  at  different  intervals  between  XIO 
and  <£26,  we  had  an  infinite  number  of  horses,  it 
will  be  admitted  that  the  competition  (which  I 
fear,  however,  would  take  an  eternal  time  to  com- 
pass) would  bring  the  upper  and  the  lower  limit 
to  a  meeting-point  (i.e.  the  interval  between  them 
would  be  infinitely  small). ^  In  that  case  the  mar- 
ginal pair  would  make  their  bargain  upon  equal 
terms  without  any  element  of  "  forced  gain  "  enter- 
ing the  market-price. 

Now  this  supposition  that  in  a  finite  market 
there  may  be,  not  8  or  80,  but  practically  an  infi- 
nite number  of  units  of  supply,  valued  at  extremely 
minute  intervals  of  difference,  is  not  a  pure  work  of 
the  imagination,  but  is  approximated  to  in  certain 
markets.  There  is  no  possible  interval  between  1 
horse  and  2  horses  in  a  supply  of  horses,  but  there  is 
an  indefinite  number  of  possible  intervals  between 
1  pound  and  2  pounds  of  gold  in  a  supply  of  gold. 
In  the  case  of  goods  which  are  infinitely  divisible, 
we  might  regard  the  supply  in  a  market  at  any 
given  time  as  consisting  of  an  infinite  number  of 

1  Jevons,  in  his  Theory  of  Political  Economy  (Ch.  IV), 
plainly  enforces  the  truth  that  the  theory  of  competition,  as 
determinant  of  price-point,  rests  upon  the  supposition  of  in- 
finite divisibility  of  supply  (cf.  p.  108).  In  fact,  the  whole 
mathematical  treatment  rests  upon  the  same  supposition,  and 
the  fact  that  supply  is  not,  in  any  case,  infinitely  divisible, 
impairs  the  practical  service  of  the  whole  mathematical  treat- 
ment. 


26  THE  ECONOMICS   OF  DISTRIBUTION. 

units  whose  valuation  in  the  minds  of  the  sellers 
grades  down  by  imperceptible  intervals  from  the 
highest  to  the  lowest  limit-price.  Such  goods  are 
gold  or  corn  or  cotton. 

The  importance  of  this  is  that,  by  taking  our 
example  of  a  market  from  such  classes  of  goods, 
we  seem  to  reach  a  market-price  by  pure  competi- 
tion of  buyers  and  sellers.  Look,  for  instance,  at 
the  local  corn-market  which  Marshall  uses  to  illus- 
trate the  determination  of  a  market-price.  Here 
we  have  a  number  of  farmers,  each  (sa}^)  with  100 
quarters  of  wheat  to  sell,  and  a  number  of  corn- 
factors,  who  are  buyers  in  this  market.  At  a 
price  of  36s.  all  the  farmers  would  be  willing  to 
sell  all  their  stock,  but  few,  if  any,  buyers  could 
be  found  at  such  a  price  :  if  35s.  was  a  possible 
price,  most  farmers  would  sell  all  they  had  ;  but  a 
few  would  hold  back  part  of  their  wheat,  thinking 
to  sell  at  a  future  market  for  36s.  Each  lower 
price  would,  of  course,  reduce  the  effective  supply 
and  increase  the  effective  demand  ;  the  price  actu- 
ally reached,  say  27s.,  secures  the  so-called  equilib- 
rium of  supply  and  demand,  i.e.  sellers  are  willing 
to  sell  (say)  two-thirds  of  their  wheat  at  27s.,  and 
buyers  will  buy  that  same  amount  at  27s. 

Now  sucli  a  market  differs  in  two  respects  from 
our  horse-market.  First,  as  to  the  units  of  supply 
and  demand.  In  a  horse-market  less  than  1 
horse  cannot  be  bought  or  sold  ;  1  horse  is  thus 
a  minimum   unit   of   supply  ;    a   dealer  with    10 


DETERMINATION   OF  A   MARKET-PRICE.     27 

horses  cannot  offer  to  supply  more  than  10  alter- 
native quantities.  But  a  farmer  with  100  quarters 
of  wheat  is  owner  of  a  much  more  elastic  and  divis- 
ible supply;  though  for  purposes  of  rough  reckon- 
ing he  may  divide  his  stock  by  tens  of  quarters  and 
reckon  it  worth  his  while  to  sell  100  at  36s.,  90 
at  34s.,  and  so  on,  there  is  nothing  to  prevent  him 
calculating  more  minutely  ;  in  theory,  at  any  rate, 
he  would  be  willing  to  sell  79  quarters  at  a  slightly 
lower  rate  than  he  would  take  for  80,  in  a  rising 
market.  At  any  rate,  it  is  easy  to  see  that  there 
is  a  far  greater  elasticity  in  supply  and  in  demand 
in  a  corn-market  than  in  a  horse-market,  a  far 
greater  variety  of  possible  prices  with  a  far  nar- 
rower interval  between  them.  This  signifies  a  far 
closer  and  more  effective  competition  between 
buyers  on  the  one  hand  and  sellers  on  tlie  other, 
the  result  being  that  the  limits  between  which 
ordinary  competition  breaks  down  are  much  nar- 
rower. 

The  second  point  of  difference  is  even  more 
important.  It  consists  in  the  fact  that  a  local  corn- 
market  is  in  far  closer  touch  with  a  wide  world- 
market  than  is  the  local  horse-market.  Where 
commodities  are  in  wide  and  general  demand, 
valuable  in  proportion  to  their  bulk  and  weight, 
so  durable  that  they  can  be  carried  far  without 
risk  or  waste,  they  are  the  subjects  of  a  world- 
market.  This  means  that  wherever  they  are  sold 
the  price  attained  at  any  day  in  any  local  market 


28  THE  ECONOMICS  OF  DISTRIBUTION. 

is  not  determined  wholly  or  chiefly  by  the  present 
local  supply  and  demand,  but  by  the  general  sup- 
ply and  demand  the  world  over.  Not  merely  the 
1000  quarters  owned  by  the  sellers,  or  the  >£1600 
or  so  of  purchasing  power  owned  by  the  buyers, 
compete  and  find  an  equilibrium  :  both  sellers 
and  buyers  are  also  influenced,  in  the  quantity 
they  offer  or  buy  at  the  several  prices,  by  the 
quotations  from  the  wider  market  upon  which  the 
total,  not  merely  of  existing  but  of  prospective, 
supply  and  demand  of  wheat  is  operating. 

So  in  a  local  corn-market  the  possible  limits  of 
competition  are  circumscribed  by  conditions  im- 
posed from  the  national  market,  or  those  great 
centres  where  national  economic  forces  are  most 
fully  operative  ;  while  the  national  market  is  in 
its  turn  kept  within  tolerably  small  limits  of 
fluctuation  by  the  international  market  which 
takes  close  account  both  of  the  present  and  the 
probable  future  stock  of  wheat  and  the  demands 
for  the  same. 

§  10.  Every  local  market,  even  for  highly  perish- 
able and  cheap  bulky  commodities,  is  of  course  to 
some  extent  affected  by  wider  market-areas,  and  to 
some  extent  by  the  general  supply  and  demand 
of  similar  commodities.  But,  in  respect  of  many 
commodities,  this  outside  contact  is  so  slight  and 
slow  that  prices  are  chiefly  the  resultant  of  local 
forces  of  supjily  and  demand.  Common  bricks 
or  plums,  for  instance,  will  have  a  large  number 


DETERMINATION   OF  A   MARKET-PRICE.     29 

of  little  market-areas,  the  prices  of  which  may- 
vary  widely.  In  the  small  local  markets  sellers 
of  bricks  or  plums  have  little  power  of  withhold- 
ing their  supply  or  disposing  of  their  goods  else- 
where, while  buyers  are  similarly  restricted  in 
their  demand  :  hence  the  pressure  of  local  or 
temporary  circumstances,  favouring  either  buyers 
or  sellers,  will  play  a  larger  part  in  determining 
a  market-price,  genuine  competition  will  tend  to 
break  down  at  any  earlier  point,  and  force  or 
superiority  in  bargaining-power  will  be  a  more 
important  factor.  On  the  other  hand,  in  the 
market  for  gold,  or  even  for  cotton,  wool,  or 
wheat,  under  normal  conditions,  buyers  and  sell- 
ers in  a  local  market  are  less  under  pressure  to  sell 
here  and  now,  to  buy  here  and  now  :  the  whole 
world-supply,  present  and  prospective,  is  taking 
part  in  the  competition  as  it  affects  each  local 
market,  and  the  local  market-price  reflects  the 
greater  delicacy  and  complexity  of  the  world- 
market.  What  this  signifies  is  that  in  commodi- 
ties belonging  to  a  world-market,  free  competition 
may  be  said  to  determine  the  price,  because  the 
number  of  actually  or  potentially  competing  units 
is  so  numerous  that  little  scope  remains  for  that 
force  or  craft  of  special  bargaining  which  plays 
a  considerable  part  in  the  small  local  market. 

In  fact,  where  the  local  market  is  in  such  close 
and  constant  organic  relation  to  the  world-market, 
the    price  attained  in   any  part  tends  to  be  not 


30  THE  ECONOMICS   OF  DISTRIBUTION. 

merely  a  market-price,  but  a  normal  price,  that  is 
to  say,  a  price  whicli  will  average  the  economic 
conditions  of  supply  and  demand  over  the  whole 
present  market,  and,  by  discounting  probable 
changes  in  future  supply  and  demand,  will  simi- 
larly average  the  series  of  temporal  prices. 

For  instance,  in  the  market  for  gold  or  for  lead- 
ing securities  of  any  kind,  if  the  competition  of 
buyers  and  sellers  worked  freely  and  were  not 
constantly  checked  and  falsified  by  the  manipula- 
tion of  rings  of  speculators,  market-prices  would 
tend  to  become  average  or  short  normal  prices. 
The  same  is  true  of  all  goods  for  which  there  is  a 
world-market.  The  competition  here  is  between  a 
vast  number  of  competing  buyers  and  sellers,  whose 
units  of  supply  and  demand  rej^resent  an  indefinitely 
large  variety  of  different  equilibriums  :  under  such 
circumstances  competition  would  do  its  work  so 
well  that  any  local  group  of  buj^ers  and  sellers 
would  find  there  remained  very  little  for  the 
higgling  of  the  market  to  achieve. 

§  11.  When  we  have  one  of  these  wide  highly 
organised  markets,  maintaining  a  genuine  compe- 
tition between  very  large  numbers  of  buyers  and 
sellers  dealing  with  large  quantities  of  divisible 
goods,  the  competition  of  buyers  and  sellers  brings 
the  price-limits  so  near  together  as  to  appear  to 
establish  a  price-point.  In  theory,  the  case  of  the 
horse-market  still  applies,  and  a  bargain  under 
conditions  of  duress  lixes  the  price-point  here  as 


DETERMINATION   OF  A  MARKET-PRICE.    31 

elsewhere;  but  tlie  influence  is  so  slight  that  it 
may  be  practically  ignored. 

Moreover,  in  the  cotton  or  the  wheat  market 
not  only  is  this  element  virtually  eliminated,  but 
the  differential  gains  of  various  buyers  and 
sellers  are  reduced  to  much  smaller  dimensions 
than  in  the  local  horse-market.  The  markets 
which  are  in  this  highly  organised  state  are  gen- 
erally those  in  which  buyers  and  sellers  are  among 
themselves  fairly  on  a  level :  sellers  are  producing 
under  such  equality  of  conditions  that  the  supply 
sold  at  a  given  price  yields  a  fairly  equal  profit  to 
the  different  sellers ;  while  buyers,  as  in  the  cotton 
or  corn  market,  are  buying  not  for  use,  but  to  sell 
again  in  some  form  or  other  under  conditions 
which  tend  to  equalise  the  subjective  gains  made 
on  their  bargains.  The  different  buyers  and 
sellers  of  raw  cotton  at  Liverpool,  at  a  given  price, 
may  be  held  to  have  made  a  subjective  gain  which 
will  not  differ  widely  in  different  cases,  unless 
where  the  seller  acts  under  some  special  pressure 
of  financial  circumstances. 

§  12.  Whenever  a  market  contains  a  consider- 
able number  of  buyers  and  sellers,  fairly  equal 
in  economic  resources  and  in  knowledge  of  com- 
modities ;  where  sellers  obtain  their  supply  under 
fairly  equal  conditions  of  trade  or  manufacture , 
where  buyers  are  buying  to  sell  again,  not  to  con- 
sume ;  where  the  articles  bought  and  sold  belong 
to  a  wide  market,  are  minutely  divisible  in  quan- 


32         THE  ECONOMICS  OF  DISTEIBUTION. 

tity  and  durable  in  nature,  —  these  conditions 
may  be  held  practically  to  eliminate  force  from 
a  market-price  and  to  make  it  the  result  of  com- 
petition alone. 

But  these  conditions  are  notoriously  absent  in 
the  great  majority  of  cases.  Take  a  rapid  sur- 
vey of  the  whole  range  of  bargaining,  examining 
the  various  classes  of  goods  as  they  exchange 
hands  in  the  different  processes  of  production  ;  in 
how  many  cases  are  the  above-named  conditions 
present  ? 

Take,  first,  the  great  extractive  industries;  con- 
sider the  bargains  made  by  farmers,  miners,  fish- 
ermen, etc.,  with  the  merchants  who  buy  their 
produce  or  the  railways  that  carry  it;  the  con- 
stant attempts  of  shippers,  importers,  and  produce- 
exchange  speculators  to  corner  supply  and  to 
operate  in  prices ;  the  advantages  which  supe- 
rior sources  of  supply,  patents  or  secret  methods 
of  production,  combinations  to  restrict  output  or 
regulate  prices  have  in  most  organised  manufac- 
tures ;  the  oscillation  of  local  corners  and  cut- 
throat competition  in  most  branches  of  retail 
trade,  —  these  and  similar  causes  render  the  con- 
ditions of  free  and  fluid  competition  inoperative 
over  the  vast  majority  of  the  processes  in  the  sale 
of  goods.  Again,  if  we  turn  to  the  bargains  for 
the  sale  or  hire  of  land,  the  conditions  are  notori- 
ously absent.  When  we  investigate  the  condi- 
tions under  which  bargains  for  the  use  of  capital 


DETERMINATION   OF  A   MARKET-PRICE.     33 

take  place,  we  shall  perceive  how  narrow  are  the 
limits  of  the  free  field  of  investment  where  bor- 
rowers and  lenders  meet  on  equal  terras.  As  to 
that  huge  class  of  bargains  which  take  place  at 
every  spot  in  the  industrial  field  for  the  sale  of 
labour-power,  in  hardly  any  cases  can  we  find  the 
conditions  of  equal  bargaining  present,  even  where 
professional  skill  or  other  highly  placed  labour- 
power  is  the  object  of  sale.  Outside  the  ordinary 
range  of  industry,  in  cases  where  bargaining  is 
between  author  and  publisher,  between  mistress 
and  domestic  servant,  between  teacher  and  parent, 
hotel-keeper  and  guest,  the  competition  is  so  slight 
and  indirect,  the  knowledge  of  the  two  parties  so 
imperfect,  that  an  equal  bargain  is  never  struck 
except  by  chance. 

It  appears  th'Cn  that  but  a  very  small  propor- 
tion  of  bargains  can  be  referred  to  an  open-faced, 
two-sided  competition  in  a  market  where  outside 
prices  are  so  directly  operative  as  to  equalise  the 
gain  for  the  individuals  who  take  part  as  buyers 
or  sellers  in  the  market. 

§  13.  This  brief  investigation  of  the  economic 
conditions  of  a  market-price  warrants  the  follow- 
ing conclusions :  — 

(1)  Every  economic  buyer  and  seller  in  a  mar- 
ket (i.e.  every  one  guided  by  self-interest  who 
knows  what  he  is  doing)  makes  some  gain  from 
his  bargain.  The  notion  supported  by  thinkers  of 
such  diverse  character  as  Bacon  and  Ruskin,  that 


34  THE  ECONOMICS  OF  DISTRIBUTION. 

in  a  trading  bargain  "  what  one  man  gains  another 
loses,"  receives  no  warrant  from  our  analysis.  It 
must,  however,  be  admitted  that  in  every  series  of 
bargains  at  a  market-price,  one  of  the  buyers  or 
sellers  will  make  his  bargain  on  such  terms  as  will 
secure  to  him  a  bare  minimum  gain. 

(2)  There  is  nothing  in  the  economic  nature  of 
a  Market  to  secure  equality  of  gain  for  any  two 
bargainers.  • 

(3)  The  amount  of  gain  which  comes  to  each 
will  depend  on  three  conditions :  (i)  the  superior 
strength  or  skill  of  one  final  bargainer  ;  (ii)  the 
ability  of  competition  between  buyers  and  sellers 
to  fix  the  limits  within  which  this  strength  or  skill 
may  operate ;  (iii)  the  difference  between  the  re- 
serve-price of  each  buyer  and  seller  and  the  actual 
price  attained. 

(4)  Where  the  market-area  is  of  wide  space 
and  time,  differential  estimates  and  power  of  bar- 
gaining will  be  of  relatively  small  importance; 
where  the  market-area  is  narrow,  they  will  be  of 
relatively  large  importance. 

APPENDIX  TO   CHAPTER  I. 

The  Relative  Strength  of  Buyer  and  Seller. 

The  analysis  of  the  process  of  bargaining  shows  that 
sometimes  the  buyers,  sometimes  the  sellers,  are  iu 
the  stronger  position  and  are  able  to  "  get  the  better  " 


APPENDIX  TO   CUAPTER  I.  35 

of  the  bargain.  No  law  of  direct  and  general  applica- 
tion assigning  this  superiority  of  bargaining  power  is 
discernible,  but  certain  conditions  are  found  to  attach 
to  specific  markets,  which  evidently  make  in  favour 
of  one  or  other  of  the  two  parties.  Setting  aside  for 
separate  and  fuller  treatment  the  markets  for  the  sale 
of  the  use  of  land,  capital,  and  labour,  and  confining 
ourselves  here  to  markets  of  commodities,  we  find  the 
relative  strength  of  buyers  or  sellers  often  associated 
directly  with  (a)  the  greater  or  less  urgency  of  the 
need  to  buy  or  sell,  (6)  the  greater  or  less  strength  or 
skill  in  the  art  of  bargaining. 

Where  the  buyer  does  not  buy  for  personal  consump- 
tion, he  is  generally  held  to  have  an  advantage  in  the 
process  of  bargain  or  exchange,  partly  because  he  is 
the  holder  of  money  —  the  least  specialised  com- 
modity —  pitted  against  the  holder  of  some  specialised 
commodity,  partly  because  the  urgency  of  a  trade- 
use  is  less  than  the  urgency  of  a  personal  need.  Biit 
where  the  buyer  is  a  direct  consumer,  this  advantage 
is  often  more  than  offset  by  the  present  pressure  of 
personal  needs  which  obliges  him  to  buy  now  from  some 
one  who  is  not  obliged  to  sell  now.  So,  for  example, 
the  venders  of  refreshments  or  books  in  a  railway 
station  enjoy  a  distinct  advantage  in  bargaining. 
The  general  rule,  however,  assigns  superiority  to  the 
ownership  of  money,  which  for  many  commercial 
purposes  is  more  desirable  than  a  nominally  equiva- 
lent value  in  specialised  wares.  It  seems  strange 
that  the  advantage  of  the  extra  stabilit}^  of  value  and 
exchangeability  attached  to  money  should  not  be 
fully  discounted  in  actual  prices;  but  it  is  found  in 


36  THE  ECONOMICS   OF  DISTRIBUTION. 

practice  that  any  owner  of  goods  for  sale  who  names 
their  "  value  "  "  would  rather  have  the  money."  If, 
however,  the  consumer  who  cannot  delay  consumption 
is  liable  to  the  disadvantage  attending  a  forced  pur- 
chase, the  producer  under  modern  commercial  condi- 
tions is  often  subject  to  the  inconvenience  of  a  "  forced 
sale,"  either  because  his  expenses  of  production  are 
incurred  on  credit  {i.e.  he  needs  money  to  pay  for 
raw  material  bought  with  bills,  to  pay  interest  on 
borrowed  capital  or  mortgage,  or  to  pay  wages  or 
other  current  business  expenses),  or  else  because  the 
goods  he  has  to  sell  spoil  or  lose  value  by  being  kept. 
A  striking  example  of  a  class  of  producers  subject 
to  the  conjoined  force  of  these  disadvantages  is  the 
agriculturist,  but  all  sellers  of  quickly  perishable 
goods  are  liable  to  this  handicap. 

If  the  owners  of  money  be  held  to  have  an  advan- 
tage as  compared  with  owners  of  goods  for  sale,  the 
sellers  of  raw  materials  which  are  needed  for  many 
different  industrial  uses,  and  of  other  less  specialised 
commodities,  will  seem  to  have  an  advantage  in  sell- 
ing to  various  groups  of  buyers  who,  because  they 
belong  to  different  trades,  will  not  act  closely  together. 
The  seller  of  timber,  wool,  or  iron  (other  things  equal) 
seems  to  hold  a  stronger  position  than  the  buyer.  It 
is,  however,  possibly  incorrect  to  attribute  the  greater 
desirability  of  holding  money  over  holding  goods  to 
the  general  command  over  commodities  attaching  to 
the  latter.  For  if  there  were  a  ready  and  perfectly 
reliable  demand  for  goods,  their  possessors,  though 
one  step  further  removed  from  the  ownership  of  any 
other  class  of  commodities  than  the   possessors  of 


APPENDIX   TO   CHAPTER  I.  37 

money,  would  have  a  compensation  for  this  remote- 
ness by  owning  something  of  more  direct  service  in 
consumption.  If  the  owner  of  corn  or  wool  or  leather 
could  rely  upon  the  speedy  sale  of  his  goods  at  a 
calculable  price,  his  command  over  commodities  in 
general  would  not  really  be  weaker  than  that  of  the 
owner  of  money,  but  only  a  little  slower  in  its  opera- 
tion. In  that  case  the  buyer  who  offered  money 
could  not  be  deemed  to  be  to  any  appreciable  extent 
the  stronger  bargainer.  It  is  therefore  the  uncertainty 
of  finding  a  purchaser  at  a  calculable  price  which 
must  be  accounted  the  weakness  of  the  seller  as  com- 
pared with  the  buyer.  This  weakness  is  plainly 
enhanced  by  certain  tendencies  of  machine-produc- 
tion and  machine-transport,  which  seem  to  keep  many 
markets  in  a  constant  or  a  frequently  recurring  condi- 
tion of  congestion :  the  eagerness  of  sellers  to  find  pur- 
chasers is  attested  both  by  the  extraordinary  energy 
in  pushing  and  advertising  goods  and  by  the  cutting 
of  the  marginal  profits  upon  each  sale  to  a  minimum. 
The  wide  prevalence  of  these  conditions  is  irrefutable 
proof  of  an  admitted  weakness  in  bargaining  on  the 
part  of  owners  of  goods  as  compared  with  owners 
of  money.^     This  superiority,  perhaps  normal  over  a 

1  It  is  curious  that  Mr.  and  Mrs.  Webb,  who,  in  the  chapter 
on  "The  Higgling  of  the  Market"  of  their  Industrial  Democ- 
racy, emphasise  and  ilhistrate  so  powerfully  the  superior  posi- 
tion of  the  buyer  ''at  each  link  in  the  chain  of  bargaining," 
fail  to  perceive  that  no  other  "  economic  "  explanation  of  this  fact 
is  possible  than  that  a  general  excess  of  producing  power  exists 
beyond  what  is  required  to  supply  the  current  demands  of  con- 
sumers. If  it  Ls  a  fact  that  "  at  each  link  in  the  chain  of  bar- 
gainings the  superiority  in  '  freedom '  is  so  overwhelmingly  on 

202933 


38  THE  ECONOMICS  OF  DISTRIBUTION. 

large  field  of  industry,  may  be  modified  by  the  nature 
of  the  money-offer  of  buyers.  Where  credit  is  freely 
given,  the  buyer  loses  part  of  his  advantage  as  owner 
of  money  —  a  fact  which  may  be  otherwise  expressed 
by  saying  that  a  buyer  will  bid  higher  when  he  need 
not  pay  ready  money. 

The  mode  of  bargaining  or  the  conditions  under 
which  bargains  are  made  have  much  to  do  with  the 
success  of  buying  and  selling.  It  may  be  broadly 
stated  that  makers  are  at  a  disadvantage  in  bargain- 
ing with  traders,  in  so  far  as  the  art  of  bargaining 
forms  a  larger  part  of  the  trader's  activity,  so  that  he 
must  be  deemed  more  highly  specialised  in  dealing. 
Where  the  productive  processes  are  conducted  under 
conditions  which  remove  the  producers  from  wide  com- 
mercial training,  and  especially  where,  as  in  farming, 
they  are  not  themselves  large  buyers  of  raw  material, 
etc.,  the  merchants  or  dealers  who  buy  their  produce 
have  a  clear  advantage.  Purchasers  of  retail  goods  are 
in  this  respect  at  a  disadvantage  in  comparison  with  the 
sellers.  They  are  less  effective  bargainers  in  so  much 
as  they  must  be  regarded  as  amateurs  bargaining 
with  specialists  for  any  particular  class  of  goods  they 
require  for  consumption.  Again,  the  conditions  under 
which  the  retail  market  is  commonly  conducted  tend 

the  side  of  the  buyer  that  the  seller  feels  only  constraint ; "  if 
"it  is  highly  significant  that  it  is  always  the  seller  who  bribes, 
never  the  buyer"  (Vol.  II,  p.  676),  this  can  only  signify  a  con- 
stant tendency  for  the  effective  supply  of  markets  to  exceed  the 
effective  demand,  only  another  way  of  stating  the  fact  of  an 
excess  of  producing  power.  It  is  significant  that  Mr.  and  Mrs. 
Webb  have  no  economic  explanation  to  offer  of  the  curious 
phenomenon  they  note. 


APPENDIX   TO   CHAPTER  I.  39 

to  secure  this  advantage  to  the  retailer.  As  Cairnes 
points  out:  "In  the  wholesale  market  the  sellers  and 
purchasers  meet  together  in  the  same  place,  affording 
thus  to  each  other  reciprocally  the  opportunity  of 
comparing  directly  and  at  once  the  terms  on  which 
they  are  severally  disposed  to  trade.  In  retail  deal- 
ing it  is  otherwise.  In  each  place  of  sale  there  is  but 
one  seller ;  and  though  it  is  possible  to  compare  his 
terms  with  the  prices  demanded  elsewhere  by  others, 
this  cannot  always  be  done  on  the  moment,  and  may 
involve  much  inconvenience  and  delay."  ("  Leading 
Principles,"  p.  112.) 

One  of  the  peculiar  advantages  of  the  large  over 
the  small  business  in  manufacture  is  that  the  scale 
upon  which  the  large  business  is  conducted  enables 
it  to  employ  skilled  specialists  in  buying  and  in 
selling. 

These  are  differences  in  the  economic  strength  or  the 
skill  of  bargaining.  One  further  point  bearing  upon 
the  process  of  bargaining  deserves  mention,  viz.  the 
relative  disadvantage  of  the  party  who  names  a  price. 
In  retail  shops  the  habit  of  ticketing  goods,  of  using 
price-lists,  or  even  of  naming  a  price  upon  request, 
gives  to  the  buyer  a  certain  advantage,  the  nature  of 
which  is  apparent  from  our  analysis  of  the  horse- 
market.  The  bargainer  who  at  the  outset  names  a 
price  gives  some  indication  of  his  subjective  valua- 
tion ;  the  buyer  might  be  willing,  if  necessary,  to  pay 
a  higher  price  than  that  named,  if  both  parties  were 
equally  ignorant  of  the  estimate  they  set  respectively 
upon  the  bargain.  In  open  bargaining  it  is  a  clearly 
recognised  point  of   skill   to  get  the  other  party  to 


40  THE  ECONOMICS   OF  DISTRIBUTION. 

name  a  price,  even  tliougli   that   price   has   little  or 
no  chance  of  being  satisfactory  to  both  parties. 

Finally,  it  must  be  remembered  that,  where  the 
conditions  of  a  perfect  market  exist,  in  the  sense  that 
all  buyers  have  the  same  valuation  and  all  sellers 
likewise,  while  the  knowledge  of  the  arts  of  bargain- 
ing and  other  special  advantages  are  equally  divided, 
the  issue  is  determined  by  numbers.  In  such  a  case 
one  side  (that  with  the  shorter  number  of  competitors) 
will  get  the  full  gain  of  the  bargain,  the  price  being 
determined  at  or  close  to  the  higher  or  the  lower  limit. 
A  reference  to  the  case  of  the  horse-market  set  forth 
in  the  text  will  make  this  evident.  Change  the  con- 
ditions of  this  market  so  as  to  present  10  willing 
sellers  at  a  minimum  price  of  £20  a  horse  and  9 
willing  buyers  who  would  consent,  if  necessary,  to  pay 
£21,  the  price  will  be  at  or  just  above  £20,  because 
the  tenth  seller,  afraid  of  failing  to  effect  a  sale,  will, 
by  competition,  beat  down  the  price  to  that  point. 
This  consideration  means  that  under  existing  indus- 
trial conditions,  where  there  are  generally  more  will- 
ing sellers  at  a  price  than  willing  buyers,  the  latter 
enjoy  a  normal  advantage. 


CHAPTER   II. 

PRODUCER'S  AND   CONSUMER'S  RENTS. 

§  1.  Before  proceeding  further  with  the  analy- 
sis of  market-price  and  the  element  of  forced  gain 
contained  in  it,  it  is  desirable  to  clear  some  mis- 
apprehension which  attaches  to  the  differential 
gains  which  play  so  prominent  a  part  in  the  analy- 
sis. Differential  rents  have  received  much  atten- 
tion from  economists  in  their  investigation  of  the 
relations  of  producers  and  consumers.  Now  these 
producer's  and  consumer's  rents,  as  they  are  called, 
have  been  a  source  of  grave  misapprehension,  by 
reason  of  the  mode  of  measuring  them,  which  has 
been  generally  adopted.  The  nature  of  this  error 
will  be  best  understood  by  examining  concrete 
examples. 

Take  the  instance  of  the  passengers  who  pur- 
chase tickets  for  32s.  8d.  to  go  from  London  to 
Edinburgh  by  a  particular  train.  Here  we  have 
a  number  of  buyers  who  pay  the  same  price  for 
their  tickets,  but  who,  presumably,  will  differ 
widely  in  the  importance  which  they  assign  to  the 
purchase  of  a  ticket.  A  is  reluctantly  leaving 
business  at  an  awkward  time  in  order  to  visit  his 

41 


42  THE  ECONOMICS   OF  DISTRIBUTION. 

relatives,  and  we  may  assume  that  if  the  price  of 
a  ticket  were  any  higher  than  32s.  Sd.,  he  woukl 
refuse  to  go.  He  ranks  as  the  marginal  buyer, 
whose  differential  gain  or  rent  is  7iiL  Turning  to 
the  other  extreme  we  find  B,  who  will  make  a 
business  profit  of  XIOOO  if  he  can  put  in  an  ap- 
pearance at  Edinburgh  within  a  certain  number  of 
hours.  B  would  pay  for  a  ticket  any  sum  short  of 
the  whole  difference  between  32s.  Sd.  and  .£1000, 
if  he  had  no  option.  His  differential  gain,  there- 
fore, appears  to  stand  at  (say)  X998.  This  is  the 
common  mode  of  measuring  producer's  and  con- 
sumer's rents.  Yet  it  is  plainly  fallacious.  For 
B's  supposed  gain  of  £998  upon  his  transaction 
with  the  railway  is  derived  truly,  not  from  that 
transaction,  but  from  a  certain  business  advantage 
he  obtains  in  a  business  bargain  in  Edinburgh. 
This  sum  will  evidently  appear  as  a  differential 
or  a  specific  gain  in  the  market  to  which  the  lat- 
ter transaction  belongs,  and  if  the  purchase  of  a 
ticket  to  Edinburgh  stands  as  a  separate  action,  the 
same  gain  will  be  counted  twice.  This  is  clearly 
inadmissible.  The  fallacy  consists  in  a  false  inde- 
pendence assigned  to  the  purchase  of  the  ticket. 
This  purchase  is  in  reality  one  of  a  number  of 
acts  complementary,  or,  in  this  case,  subsidiary,  to 
the  business  transaction  from  which  the  gain 
of  £998  emerges.  In  order  to  reacli  Edinburgh 
in  time,  he  may  be  obliged  to  send  a  telegraph,  to 
take  a  cab,  and  to  make  sundry  otlier  small  out- 


PRODUCER'S  AND   CONSUMER'S  RENTS.      43 

lays;  each  of  these  may  be  a  necessary  means  to 
his  end,  in  which  case,  according  to  the  accepted 
mode  of  estimating  differential  gains,  the  <£998 
will  be  counted  over  again  many  times.  Evi- 
dently this  method  of  detaching  each  transaction 
is  illicit.  A  number  of  related  actions  must  be 
taken  to  form  an  organic  group,  and  the  true  dif- 
ferential gain  will  be  the  net  differential  gain 
upon  the  group.  The  business  custom  which 
would  reckon  the  price  of  the  ticket  and  other 
incidental  outlays  as  expenses,  to  be  deducted 
from  the  gain  of  the  transaction  toward  which 
they  were  contributory  means,  is  clearly  the  logi- 
cal mode  of  procedure.  Where  expenses  may  be 
incurred,  partly  on  their  own  account,  because 
they  contribute  some  direct  satisfaction  to  the 
spender,  and  partly  as  a  means  to  secure  some 
ulterior  gain,  it  may  be  difficult  or  even  impossi- 
ble to  make  a  true  assignment  of  differential  gains. 
A  business  man's  expenditure  during  a  given  time 
may  not  easily  break  up  into  separate  groups  cen- 
tring round  some  distinct  business  "  deal "  ;  even 
where  a  large  number  of  transactions  are  clearly 
recognised  as  incidental,  the  main  deals,  from 
which  the  "  gains "  directly  proceed,  may  be 
closely  connected  or  mutually  dependent. 

But,  however  difficult  it  may  be  in  practice  to  find 
the  true  group-unity  in  a  number  of  dealings,  the- 
ory requires  that  we  reckon  differential  gains  upon 
the  group,  and  not  upon  a  falsely  isolated  item. 


44  THE  ECONOMICS   OF  DISTRIBUTION. 

The  fallaciousness  of  the  separatist  treatment 
is  still  more  glaring  when  we  take  the  common 
instance  of  the  differential  gain  attributed  to  the 
purchaser  of  some  necessary  of  life.  Each  time 
a  man  buys  his  necessary  supply  of  food  or  cloth- 
ing, he  can  appear  to  make  a  differential  gain 
measured  by  the  difference  between  the  price  he 
pays  and  the  price  he  would  be  willing  and  able 
to  pay  if  he  were  compelled  to  do  so.  "  All  that 
a  man  hath  will  he  give  for  his  life,"  so  that  the 
difference  between  the  price  actually  paid  and  the 
total  possessions  of  the  purchaser  will  rank  as 
differential  gain  on  each  occasion  when  a  necessary 
is  bought. 

§  2.  These  reflections  seem  to  require  impor- 
tant modifications  to  be  made  in  the  treatment  of 
producer's  and  consumer's  rents.  The  common 
presentation  of  consumer's  rents  assigns  to  the 
consumer  a  rent  upon  that  portion  of  his  income 
spent  as  necessaries,  which  is  infinitely  great 
when  measured  in  utility,  and  which,  when  meas- 
ured in  money,  is  equal  to  the  whole  of  the  re- 
mainder of  his  income  which  he  would  have  con- 
sented to  add  to  the  price  actually  paid  for  neces- 
saries, had  he  been  compelled  to  do  so.  So,  if  we 
suppose  a  case  of  a  man  spending  an  income  of 
.£400  a  year,  the  first  XlOO  going  for  necessaries, 
the  second  for  conveniences,  the  third  for  com- 
forts, the  fourth  for  luxuries  (taking  the  conven- 
ient  distinction    usually    made),   the    consumer's 


producer's  and  consumer's  rents.    45 

rent  obtained  on  the  outlay  of  the  first  XlOO 
would  be  j£300,  upon  the  second  X200,  and 
upon  the  third  ,£100,  while  the  last  can  yield  no 
consumer's  rent,  for  he  had  no  reserve  out  of 
which  he  could  have  paid  a  higher  price  for  the 
luxuries  he  bought.  Such  analysis  yields  a  con- 
sumer's rent  of  X600  out  of  a  total  expenditure 
of  X400.  Taking  a  nicer  discrimination  in  the 
relative  subjective  valuations  of  different  portions 
of  each  group  of  goods,  we  should,  of  course,  obtain 
a  more  complex  measurement  (all  luxuries,  for 
instance,  except  the  least  valued,  yielding  some 
rent) ;  but  the  rough  estimate  will  serve  to  illus- 
trate our  point,  which  is  this  :  If  the  man  be  sup- 
posed, at  any  given  time  when  he  is  making  a 
purchase,  to  have  at  his  command  his  whole  in- 
come of  X400,  on  each  separate  occasion  when  he 
buys  a  weekly  store  of  necessaries  he  will  appear 
to  make  a  consumer's  rent,  measured  by  the  dif- 
ference between  what  he  pays  and  X400,  and  the 
net  rent  during  the  year  will  depend  upon  the 
number  of  times  he  buys  necessaries.  The  same 
will  hold  of  his  other  non-necessary  purchases. 
Or  again,  if  this  man  has  <£100  saved  in  the  bank, 
this  <£100  will  rank  as  rent  every  time  he  makes 
a  purchase  of  necessaries,  for  he  would  and  could 
pay  it  in  addition  to  the  price  he  actually  pays, 
rather  than  go  without  a  necessary.  This  also 
will  hold  of  his  other  purchases,  of  conven- 
iences, etc.,  for  he  would  consent  to  pay  a  por- 


46  THE  ECONOMICS   OF  DISTRIBUTION. 

tion  at  least  of  his  saved  XlOO  rather  than  fail 
to  get  them. 

It  is  evident  from  this  that  the  assignment  of  a 
consumer's  rent  upon  a  particular  purchase  is  il- 
licit. A  consumer's  rent  can  be  rightly  reckoned 
only  by  considering  the  totality  of  purchases  over 
a  given  period  and  the  totality  of  the  current  in- 
come during  such  period.  When,  therefore,  Pro- 
fessor Marshall  says,i  "  The  excess  of  the  price 
which  he  would  be  willing  to  pay  rather  than  go 
without  it,  over  that  which  he  actually  does  pay, 
is  the  economic  measure  of  this  surplus  pleasure, 
and  may  be  called  consumer's  rent,"  his  defini- 
tion is  doubly  fallacious.  In  the  first  place,  the 
mere  willingness  to  pay  cannot  be  a  source  of  con- 
sumer's rent,  nor  indeed  does  Professor  Marshall 
intend  that  it  shall  be  so  understood.  The  will- 
ingness to  pay  must  be  backed  by  the  power  to 
pay.  But  this  power  to  pay,  as  we  have  shown, 
cannot  be  rightly  reckoned  upon  the  single  pur- 
chase. In  order  to  measure  it,  we  need  to  take  a 
related  group  of  purchases,  and  if  we  are  dealing 
with  rent  derived  from  the  expenditure  of  an  in- 
come supposed  to  cover  a  period  of  time,  the 
group  must  consist  of  the  whole  number  of  pur- 
chases within  that  time.^ 

1  Principles,  Bk.  Ill,  Ch.  VI,  §  1. 

2  Professor  Nicholson  (Principles  of  Political  Economy, 
Vol.  I,  p.  58)  effectively  discloses  the  illusory  uature  of  the 
attempt  to  measure  total  utility  by  price. 


PBODUCEli^S  AlfD   CONSUMER'S  BENTS.      47 

§  3.  It  may,  indeed,  be  questioned  whether  this 
mode  of  reckoning,  thus  logically  forced  upon  us, 
does  not  invalidate  the  utility  of  consumer's  rent 
altogether.  For  if  we  suppose  that  (<i)  either  the 
whole  of  the  year's  purchases  are  made  at  a  single 
time  with  the  whole  of  the  year's  income,  or  that 
(6)  each  piece  of  income  as  soon  as  it  is  received 
is  laid  out  in  a  purchase,  it  will  appear  that  no 
consumer's  rent  emerges,  either  upon  the  total- 
ity of  purchases  in  the  one  case  (a),  or  upon  any 
individual  purchase  in  the  other  case  (5)  ;  for  in 
neither  case  is  there  any  residue  of  money  in  the 
hands  of  the  purchaser  which  he  could  and  would 
have  paid  rather  than  fail  to  get  what  he  buys. 
If  I  spend  my  income  literally  as  fast  as  I  receive 
it,  no  consumer's  rent  emerges.  It  is  only  the 
spare  cash  in  my  purse  after  I  have  made  a  pur- 
chase, all  or  part  of  which  constitutes  consumer's 
rent :  if  my  income  were  doled  out  to  me  for  each 
specific  purchase,  though  my  income  over  a  period 
of  time  were  just  as  large,  no  consumer's  rent 
could  appear. 

One  qualification  to  this  conclusion  seems  to  be 
required.  If  I  do  not  spend,  but  save,  a  portion 
of  my  income,  that  saving  rightly  appears  as 
consumer's  rent,  even  when  the  totality  of  pur- 
chases is  set  against  the  total  income  ;  for  I  would 
have  sacrificed  the  whole  of  this  saving  rather 
than  have  dispensed  with  a  necessary,  and  some  of 
it  rather  than  Sfo  without  a  convenience. 


48         THE  ECONOMICS   OF  DISTRIBUTION. 

I  suggest,  therefore,  that  savings  may  be  the 
only  legitimate  consumer's  rent,  when  we  take 
an  organically  related  group  of  purchases  meas- 
ured over  a  period  of  time  and  compare  them 
with  the  income  received  during  that  time. 

It  may,  indeed,  be  arguable  that  the  term  "  con- 
sumer's rent "  should  continue  to  be  applied  to 
the  .£300  which  our  man  would  have  consented  to 
spend  upon  necessaries,  had  he  been  obliged  to  do 
so ;  but  there  seems  little  advantage  in  this  appli- 
cation of  the  term.  Our  first  rude  reckoning  of 
consumer's  rent  upon  the  supposition  that  the 
first  £100  of  an  income  of  .£400  was  spent  on 
necessaries,  the  second  <£100  on  conveniences, 
the  third  on  comforts,  and  the  fourth  on  luxuries 
would,  we  found,  yield  a  total  rent  of  £600, — 
£300  on  the  first,  £200  on  the  second,  and  £100 
on  the  third  division.  But  this  reckoning  must 
also  be  discarded,  for  it  is  evidently  just  as  il- 
logical to  make  an  artificial  severance  of  expen- 
diture into  four  groups,  and  to  treat  the  whole 
income  as  if  available  for  each  group,  as  it  would 
be  to  take  the  whole  £400  into  account  whenever 
a  single  purchase  of  a  necessary  or  a  convenience 
was  taking  place. 

If  it  is  still  held  convenient  to  retain  the  cate- 
gory of  consumer's  rent,  it  must  be  understood 
that,  in  the  instance  we  have  taken,  the  total  con- 
sumer's rent  on  purchases  during  the  year  will 
only  amount  to  the  £300  spent  on  other  things 


producer's  and  consumer's  rents.    49 

than  necessaries.  Thus  conceived,  consumer's 
rent  will  be  measured,  not  on  the  individual 
transaction,  but  upon  total  expenditure  over  a 
period  of  time,  and  will  be  equivalent  to  that 
portion  of  the  income  which  is  either  spent  on 
other  things  than  necessaries,  or  is  saved.  ^ 

§  4.  Now  let  us  turn  to  producer's  rent.  The 
excess  of  price  actually  obtained  over  the  price 
which  the  seller  would  have  consented  to  take 
forms  producer's  rent.  Differential  advantages 
for  production  may  be  said  to  be  the  origin  of 
these  rents  in  competitive  trade.  Let  us  suppose 
that  among  cycles  competing  for  sale  at  ,£18,  the 
most  expensively  produced  cost  <£15  to  make, 
while  some  others  —  made  by  makers  enjoying 
superior  economies  of  production  —  may  be  pro- 
duced at  £12  ;  in  this  case  £3  ranks  as  producer's 

1  This  conclusion  may  be  illustrated  by  a  more  detailed 
examination  of  the  illustration  of  consumer's  rent  Marshall 
takes  (Bk.  Ill,  Ch.  VI).  He  takes  the  case  of  a  man  who 
buys  7  tons  of  coal  at  £1  per  ton.  This  man  would  have  paid 
£10  rather  than  fail  to  get  one  ton,  £7  rather  than  fail  to  get 
a  second  ton,  £5  for  a  third  ton,  £3  for  a  fourth,  £2  for  a 
fifth,  30s.  for  a  sixth.  Since  he  only  pays  £1  for  each  ton,  his 
consumer's  rent  on  the  7  tons  amounts  to  £22^.  Now,  though 
none  of  this  cost  can  rank  as  a  "necessary"  (for in  that  case 
he  would  have  been  willing  to  pay  the  whole  £7  +  £22^  for  the 
first  ton),  it  ranks  as  a  prime  convenience  of  life.  'When,  there- 
fore, we  say  that  this  man  would  have  willingly  paid  £22J 
more  in  order  to  get  the  coal,  we  mean  that  he  would  have 
sacrificed  the  other  comforts  or  luxuries  upon  which  he  has 
already  spent  £22 J  (or  the  £22 J  savings,  if  he  has  saved  it). 
But  if,  instead  of  coal,  we  took  bread  or  any  necessary,  it  is 


50  THE  ECONOMICS   OF  DISTRIBUTION. 

rent.  At  first  sight  this  rent  seems  to  be  calcu- 
lable upon  a  single  act  of  sale,  but  it  is  not  really 
so.  For  this  maker  can  produce  at  X12  not  the 
particular  cycle  which  is  sold  for  £18,  but  this 
cycle  in  conjunction  with  a  large  number  of 
others.  It  is  only  produceable  at  X12  as  one 
unit  in  a  large  output.  Thus  the  consumer's 
rent  of  .£3  is  based  upon  an  assumption  involv- 
ing a  large  number  of  other  sales.  Expenses 
of  production  cannot  be  taken  as  any  definite 
amount  in  reference  to  a  single  sale,  just  as  util- 
ity of  consumption  reckoned  in  money  cannot  be 
taken  as  a  definite  amount  in  reference  to  the  pur- 
chase of  a  single  consumable. 

The  true  basis  of  calculation  for  producer's 
rent  will  be  the  total  output  of  a  particular  busi- 
ness over  a  period  of  time,  as  in  the  case  of  the 

easy  to  see  that  this  same  £22^,  plus  all  the  part  of  his  income 
spent  on  conveniences,  comforts,  and  luxuries,  will  figure  as 
consumer's  rent  upon  the  purchase  of  bread.  Let  him  have 
an  income  of  £1000  a  year,  £40  of  which  is  spent  on  necessary 
food,  the  rest  of  the  £960  will  appear  as  consumer's  rent  upon 
purchases  of  food,  for  he  would  have  paid  it  all  rather  than  fail 
to  get  the  food.  This  same  sum,  or  part  of  it,  cannot  rightly 
be  reckoned  over  again  as  more  consumer's  rent  upon  coal 
and  other  commodities  which  the  consumer  appears  to  value 
at  a  higher  price  than  he  gives. 

The  total  consumer's  rent  cannot  exceed  £960,  and  would, 
in  fact,  appear  to  correspond  to  that  portion  of  his  income  spent 
upon  non-necessaries,  including  any  .savings  he  might  make. 

Marshall's  mode  of  reckoning  would  enable  the  same  money 
income  to  count  over  and  over  again,  as  often  as  a  purchase 
was  made. 


producer's  and  consumer's  rents.    51 

consumer's  expenditure  of  income.  So  the  net 
profit  on  a  given  business  over  a  month  or  a 
year  may  be  legitimately  taken  as  the  basis  of 
measurement  for  a  producer's  rent. 

The  term  "net  profit"  is  proverbially  ambiguous. 
The  producer's  rent,  however,  may  be  taken  to 
be  any  excess  of  profit  that  may  accrue  in  a  busi- 
ness during  a  given  period  over  and  above  the 
minimum  profit  required  to  induce  the  continued 
application  of  industrial  power.  This  excessive 
profit  doubtless  emerges  in  each  act  of  sale;  but 
it  cannot  be  rightly  calculated  on  the  separate 
sales,  since  the  expenses  of  production  of  one 
article  are  organically  related  to  those  of  other 
articles.  The  true  producer's  rent  thus  repre- 
sents the  money  value  of  a  differential  economy 
of  production,  as  compared  with  the  economy  of 
the  least  effective  producer  competing  in  the 
market,  and  is  estimated  upon  the  total  business 
over  a  period  of  time.  The  true  consumer's  rent 
represents  a  differential  economy  of  consumption, 
expressed  in  the  money  value  of  that  portion  of 
consumption  and  saving  which  takes  place  during 
a  given  period,  over  and  above  the  necessary  mar- 
gin of  subsistence.  Thus  we  place  the  two  rents 
in  line  with  one  another :  the  jjroducer's  rent 
measured  from  a  marginal  expense  of  production 
(i.e.  the  smallest  sum  necessary  to  recoup  the  costs 
of  production  of  the  portion  of  supply  produced 
under  the  least   favourable   circumstances)  ;    the 


62  THE  ECONOMICS   OF  DISTRIBUTION. 

consumer's  rent  measured  from  a  marginal  ex- 
pense of  consumption  (the  smallest  sum  neces- 
sary to  maintain  the  consumer's  life  under  the 
least  favourable  circumstances). 

§  5.  Consumer's  rent  is  sometimes  stated  in 
direct  relation  to  reductions  of  price  of  a  com- 
modity. For  instance,  a  fall  in  the  marginal 
expenses  of  producing  cotton  goods  represented 
in  a  fall  of  prices  is  described  as  yielding  a  con- 
sumer's rent.  This  treatment,  however,  involves 
an  assumption  of  the  stability  of  money  income  of 
consumers  which  is  not  legitimate.  It  may  be  that 
a  fall  in  price  of  commodities  is  also  an  economic 
cause  of  a  fall  of  income  to  a  class  of  consumers  ; 
in  that  case  the  fall  of  price  does  not  yield  to  mem- 
bers of  this  class  a  true  consumer's  rent,  for  the 
margin  for  purchases  outside  of  necessaries  is  not 
increased.  Though  it  may  be  true  that  a  fall  of 
money  prices  does  commonly  increase  the  purchas- 
ing power  of  consumers  and  so  raise  their  con- 
sumer's rent,  the  fixity  of  money  income  is  not 
rightly  assumed  in  a  community  where  incomes 
are  ultimately  paid  out  of  the  prices  received  for 
sale  of  commodities. 

§  6.  This  consideration  of  producer's  and  con- 
sumer's rents  shows  a  tendency  on  the  part  of 
differential  rents  of  buyers  and  sellers  in  a  mar- 
ket to  assume  an  exaggerated  size  by  reason  of  an 
assumption  of  independence  and  isolation  of  a 
small  local  or  temporal  group  of  transactions. 


producer's  and  consumer's  rents.    63 

The  criticism  of  consumer's  rent  may  at  first 
siglit  appear  inapplicable  to  the  differential  gains 
of  buyers  who  buy  not  for  "  consumption "  or 
direct  personal  enjoyment,  but  in  order  to  sell 
again  or  to  use  as  a  means  of  production.  But 
when  buyers  are  manufacturers  who  buy  raw 
materials  of  manufacture,  or  are  retailers,  their 
differential  gains  may  either  be  accounted  anal- 
ogous to  consumer's  rents,  —  consumers'  utility 
being  imputed  to  the  various  production-goods 
which  are  required  in  the  different  stages  of 
production,  in  accordance  with  the  analysis  of 
Wieser  and  the  Austrian  School,  —  or  they  may 
be  taken  as  a  source  of  future  producer's  rents 
in  the  manufactory  or  the  retail  business  to  which 
the  buyer  devotes  the  goods  he  buys.  The  latter 
is  perhaps  the  more  convenient  mode  of  reckoning. 
Where  the  buyers  are  manufacturers  purchasing 
their  materials  of  manufacture,  any  differential 
gain  they  make  will  be  represented  by  a  differen- 
tial gain  which  the  lower  expense  of  production 
in  their  business  will  enable  them  to  obtain  from 
the  sale  of  the  manufactured  goods  into  which 
these  materials  shall  pass- 
Since  the  residual  element  of  forced  or  specific 
gain  in  a  market-price  is  dependent  on  and 
measured  from  the  differential  valuations  of  tlie 
limiting  buyer  and  seller,  the  character  of  quan- 
titative exactitude  imputed  to  it  in  the  illustra- 
tion of  a  market,  borrowed  from  Bohm-Bawerk, 


54  THE  ECONOMICS   OF  DISTRIBUTION. 

will  be  subject  to  a  similar  process  of  qualiti- 
cation. 

In  fine,  the  group  of  transactions  taken  to  con- 
stitute a  market  at  a  given  place  and  time  has  had 
ascribed  to  it  an  independence  which  is  unreal, 
with  the  result  that  a  false  definiteness  appears  in 
the  gains  which  the  different  parties  are  assumed 
to  make  from  their  transaction. 

But  the  recog-nition  of  this  truth  does  not  im- 
pair  the  fundamental  validity  of  the  analysis  of  a 
market.  The  two  elements  of  differential  and 
specific  gain  which  this  analysis  discovered  in  the 
market  are  really  there,  though  the  actual  condi- 
tions of  a  market  prevent  them  from  being  subject 
to  the  j)recise  measurement  ascribed  to  them  in 
our  falsely  isolated  instance. 


CHAPTER   III. 

THE    DETERMINATION    OF    LONG-PERIOD    PRICES 
AND    OP   VALUE. 

Part  I. 

§  1.  It  has  appeared  that  the  process  by  which 
a  market-price  is  reached  makes  no  provision  for 
the  equal  distribution  of  the  advantage  of  a  bar- 
gain in  the  case  of  any  of  the  pairs  which  effect  a 
sale  in  the  market.  It  is  equally  clear  that  the 
amount  of  gain  which  accrues  to  each  party  re- 
spectively in  a  number  of  bargains  at  a  market- 
price  will  be  determined  by  certain  forces  which 
lie  outside  and  beyond  the  machinery  of  compe- 
tition and  bargaining  in  the  market,  and  which 
assign  to  the  body  of  buyers  and  the  body  of  sell- 
ers the  economic  power  which  is  represented  in 
the  actual  gain  each  gets  from  the  transaction. 

If,  putting  the  matter  in  general  terms,  we  say 
that  the  relation  of  supply  to  demand  determines 
the  market-price,  we  are  driven  for  further  ex- 
planation to  examine  the  forces  which  give  power 
to  supply  and  to  demand. 

First,  a  word  further  as  to  normal  price.  It  is 
sometimes  suggested  that  though  a  market-j)rice 

55 


56  THE  ECONOMICS    OF  DISTRIBUTION. 

may,  by  virtue  of  passing  or  local  circumstances, 
lean  in  favour  either  of  buyers  or  sellers,  there 
exists  something  called  a  normal  price,  round 
which  market-prices  oscillate,  which  averages  the 
fluctuations  of  market-prices  over  a  period  of 
time,  and  which  in  the  long  run  divides  equally 
the  advantage  among  buyers  and  sellers.  Now 
this  term  "normal  price  "  has  its  uses.  But  it  must 
be  kept  in  mind  that  a  normal  price  is  nothing 
but  an  average  of  market-prices,  itself  varying 
according  to  the  number  of  different  market- 
prices  it  averages.  The  notion,  therefore,  that  in 
a  normal  price  the  inequality  of  competing  or 
bargaining  power  between  buyers  and  sellers  will 
be  eliminated,  and  that  the  normal  price  repre- 
sents absolutely  free  competition,  is  utterly  chi- 
merical. The  identification  of  the  normal  or  aver- 
age price  with  what  theoretic  economists  some- 
times still  call  a  natural  price,  whereby  exchanges 
take  place  with  absolute  reference  to  cost  of  pro- 
duction or  some  other  standard  of  value,  has  no 
validity.  For  we  have  no  reason  to  assume  that 
a  normal  price,  which  represents  market-prices  of 
wheat  or  horses  over  a  period  of  a  year  or  two 
years,  is  a  price  which,  if  it  were  constant  through 
that  period,  would  divide  equally  among  buyers 
and  sellers  the  total  gain  of  the  transactions.  If 
the  advantage  which  one  party  may  possess  in  a 
market  were  simply  due  to  chance  (to  some  sud- 
den or  unaccountable  facts),  and  there  were  an 


LONG-PERIOD  PRICES  AND    VALUE.         57 

equal  probability  of  this  chance  favouring  one 
side  or  the  other,  on  that  supposition  an  average 
or  normal  price  would  be  one  which  eliminated 
the  advantage  in  a  market.  But  how,  if  the  su- 
periority of  competition  belongs  to  one  side  or  the 
other,  not  merely  in  a  single  market-price,  but 
over  the  whole  series;  if  one  side  has  an  advan- 
tage on  the  average  ?  Evidently  the  normal 
price  will  not  eliminate,  but  will  reflect  that  ad- 
vantage, and  a  normal  price  will  in  no  sense  be  a 
natural,  or  a  "  free  competition,"  price.  If  one  of 
the  two  sets  of  bargainers  enjoys  a  constant  ad- 
vantage in  the  power  to  manipulate  a  profit  by 
passing  circumstances,  or  a  power  resting  on  some 
superior  source  of  supply,  it  follows  that  a  nor- 
mal price  which  merely  averages  actual  market- 
prices  will  include  an  element  of  inequality. 
Average  the  dealings  of  small  money  lenders  with 
their  clients  over  a  term  of  years;  you  obtain  a 
normal  price  of  such  loans,  but  that  price  reflects 
a  normal  advantage  possessed  by  such  money  lend- 
ers. For  certain  purposes,  theorists  are  doubt- 
less at  liberty  to  ignore  these  normal  advantages 
and  to  consider  industry  under  a  condition  of  ab- 
solutely free  competition  of  capital  and  labour. 
But  much  intellectual  harm  has  resulted  from 
economists  leaving  the  consideration  of  an  actual 
market-price,  and  hastening  to  the  consideration 
of  a  normal  price,  which  in  one  breath  they  re- 
gard as  an  average,  in  another  as  a  "  natural," 


58  THE  ECONOMICS   OF  DISTRIBUTION. 

price  expressing  the  relation  of  commodities  under 
purely  ideal  conditions. 

§  2.  The  laws  of  distribution  which  underlie 
the  bargain  are  best  studied  as  they  govern  the 
forces  operating  in  the  market.  Some  of  those 
very  factors,  which  it  is  believed  a  normal  price 
eliminates,  are  essential  to  the  study. 

Let  us,  then,  return  to  our  market-price.  We 
have  seen  how  it  is  actually  determined  in  the 
market,  given  certain  buyers  and  sellers  with 
their  valuations  ;  but  we  want  further  to  know 
what  outside  economic  forces  determine  such  and 
such  buyers  and  sellers  to  enter  the  market  and 
bargain  at  such  valuations. 

Now  these  deeper  economic  forces,  which  govern 
market-prices,  are  best  examined  as  they  are  oper- 
ative in  a  change  of  price. 

What  is  the  cause  of  a  price-change  ?  The 
question  sounds  a  simple  one,  and  economists 
generally  agree  in  the  terms  of  their  answer.  A 
price-change  is  directly  motived  by  a  shift  in  the 
quantitative  relation  between  supply  and  demand 
at  the  previous  price.  But  what  is  here  suggested 
by  supply  and  demand  ?  The  supply  which 
thus  operates  in  price-change  evidently  does  not 
mean  the  total  stock  of  goods  in  existence,  but  the 
quantity  wliich  sellers  are  willing  and  able  to  sell 
lit  the  former  jirice.  Similarly  with  demand.  If 
\ve  are  to  place  it  in  true  relation  with  this  su2)ply, 
demand  must  mean  either  the  quantity  of  goods 


LONG-PERIOD  PRICES  AND    VALUE.         59 

which  buyers  are  willing  and  able  to  buy  at  the 
former  price,  or  the  quantity  of  money  buyers  are 
able  and  willing  to  pay  for  goods  at  the  former 
price.  If,  however,  taking  these  meanings  of  the 
terms,  we  turn  to  the  mechanism  of  the  market, 
we  find  them  defective  in  that  they  furnish 
a  merely  statical  setting  to  a  dynamic  problem. 
Supply  and  demand  thus  conceived  are  stationary 
amounts.  Now,  price-change  is  a  process,  and  in 
order  to  understand  this  process,  what  we  have  to 
estimate  is  the  rate  at  which  the  stock  of  goods  is 
increased  and  depleted  —  a  flow  and  not  a  fund. 
But,  if  we  conceive  supply  and  demand  as  quan- 
tities of  goods  (or  money)  regarded  at  a  particu- 
lar time,  we  conceive  them  as  funds.  In  order 
to  study  price-change  properly,  we  must  express 
supply  and  demand  as  flows,  i.e.  measure  them 
as  processes  taking  place  in  time.  Consistently 
with  this  purpose,  supply  may  mean  the  total  stock 
offered  for  sale  at  a  price  during  any  given  time, 
and  demand  may  mean  quantity  of  purchases  at 
a  price  within  a  given  time,  or  quantity  of  money 
expended  at  a  price  within  a  given  time.  But  it 
will  be  more  convenient  to  define  the  terms  more 
narrowly,  confining  supply  to  the  rate  of  increase 
of  stock;  demand  to  the  rate  of  withdrawal  from 
stock  (or  the  rate  of  payment  of  money  in  with- 
drawing from  stock).  Thus  alone  do  we  rightly 
come  to  regard  supply  and  demand  as  processes 
or    "  flows,"    and    the    supply  and   demand  with 


60  THE  ECONOMICS   OF  DISTRIBUTION. 

which  we  concern  ourselves  will  be  equivalent 
to  the  rate  of  production  and  of  consumption. ^ 
Where  goods  flow  out  of  a  stock  at  the  same  pace 
as  they  flow  in,  the  price  remains  firm,  and  de- 
mand and  supply  will  be  said  to  be  equilibrated  ; 
where  the  inflow  is  faster  than  the  outflow,  prices 
fall,  and  supply  will  be  said  to  exceed  demand  ; 
where  the  outflow  is  faster,  prices  rise  and  de- 
mand exceeds  supply.  This  setting  regards  de- 
mand primarily  as  a  rate  of  outflow  of  goods. 
But  if  we  regard  demand  as  a  power  exercised  by 
the  purchaser,  it  signifies  and  is  measured  by  an 
inflow  of  money.  The  quantitative  relation  of 
supply  and  demand  may  be  expressed  in  either 
measure  of  demand.  But  in  dealing  with  the 
mechanism  of  exchange,  it  is  best  to  regard 
demand  as  an  action  proceeding  from  the  buyer 
and  to  measure  it  in  the  terms  of  purchasing 
power. 

Any  increase  or  decrease  of  money,  expended 
upon  goods  at  a  given  price  within  a  given  time, 
implies  a  corresponding  increase  or  decrease  in 
quantity  of  goods  bought,  so  that  no  error  will 
arise  from  substituting  the  money-measure  for  the 
goods-measure  of  demand,  and  regarding  it  as  an 

1  The  term  "  consumption  "  is  here  used  in  the  loose  business 
sense,  in  which,  for  instance,  it  is  said,  cotton-yarn  or  iron  is 
consumed  wlien  it  is  utilised  in  manufacturinp^  processes.  In 
strict  statements  of  economic  tlicory,  it  is  desirable  to  confine 
consumption  to  the  use  of  retail  goods  by  so-called  consumers. 


LONG-PERIOD  PRICES  AND   VALUE.        61 

inflow  of  money  from  the  purchaser  instead  of  an 
outflow  of  goods  from  the  seller. 

Keeping  clearly  in  mind  this  conception  of 
supply  and  demand  as  a  rate  of  flow,  it  is  hardly 
possible  to  misstate  the  law  of  price-change. 

So  long  as  a  body  of  sellers  in  a  market,  main- 
taining the  same  stock  of  goods,  can  sell  those 
goods  at  the  same  pace  at  which  they  have  sold 
them  hitherto,  they  will  not  lower  and  cannot 
raise  the  price.  If  they  lower  the  price,  this  act 
means  either  a  fall  off  in  the  pace  at  which  buyers 
ask  for  goods,  or  it  means  that  they  have  increased 
their  stock,  and  in  order  to  make  sales  correspond 
with  this  increased  rate  of  supply,  they  must 
stimulate  demand  by  lowering  prices ;  if  they 
raise  their  price,  it  means  either  a  reduction  of 
supply  in  face  of  a  constant  or  an  increasing 
demand,  or  it  means  a  growth  of  the  rate  at 
which  purchases  are  made  from  a  constant  or 
decreasing  supply. 

Thus  there  are  two  immediate  causes  of  a  rise 
of  price,  —  viz.  a  relative  decrease  of  supply  or 
a  relative  increase  of  demand ;  two  causes  of  a 
fall  of  a  price,  —  a  relative  increase  of  supply  or 
a  relative  decrease  of  demand. 

§  3.  This  somewhat  pedantic  formulation  of  the 
law  of  price-change  is  rendered  necessary  by  the 
fact  that  in  working  out  special  problems,  economic 
thinkers  not  infrequently  ignore  the  law  and 
adduce   distant  forces  as  causes  of   a  change  of 


62  THE  ECONOMICS   OF  DISTRIBUTION. 

price,  without  showing  how  they  operate  in  alter- 
ing the  quantitative  relation  between  the  flow  of 
supply  and  of  demand.  I  might  illustrate  from 
every  page  of  the  elaborate  controversies  upon 
money.  Generations  of  economists  have  argued 
the  influence  of  quantity  of  gold  or  of  money 
upon  prices,  without  recognising  that  they  are 
under  any  obligation  to  show  how  an  increase  or 
a  decrease  of  money  will  affect  the  rate  of  supply 
or  the  rate  of  demand  for  commodities  :  this  final 
link  required  to  connect  quantity  of  money  with 
price-change  is  almost  always  either  jumped  or 
ignored,  the  real  issue  being  begged  in  some  more 
or  less  ingenious  manner.  Persons  who  so  confi- 
dently affirm  that  an  increased  quantity  of  gold  or 
other  money  would  of  necessity  raise  price,  are 
required  to  show  that  this  increase  of  money 
necessarily  means  an  increased  rate  of  purchase 
of  commodities,  or  a  decrease  in  the  supply  of 
commodities ;  this  they  seldom  or  never  attempt 
to  do. 

Of  course  there  are  numerous  forces  (and  mone- 
tary ones  among  them)  which  can  be  rightly  spoken 
of  as  causing  changes  of  price,  but  they  all  act 
through,  and  can  be  tested  by,  their  influence  upon 
rate  of  demand  or  supply. 

§  4.  Turning  then  to  our  issue,  price-change, 
we  see  sellers  and  buyers  as  repositories  of  supply 
and  demand. 

Whatever  force  proceeding  from  either  side  dis- 


LONG-PERIOD  PRICES  AND    VALUE.         03 

turbs  the  existing  balance  of  supply  and  demand 
affects  price.  It  also  affects  value.  Nearly  the 
whole  of  the  trouble  about  value  has  arisen  from 
separating  unduly  the  consideration  of  value  from 
that  of  price.  Once  keep  clearly  in  mind  the 
fundamental  truth  that  price  is  value  expressed 
in  terms  of  money,  it  will  then  appear  that  the 
most  profitable  way  of  studying  the  nature  of 
value  is  to  study  the  forces  which  cause  price- 
change.  The  notion  that  value  is  some  inherent 
and  abiding  property  of  wealth,  which  escapes  at 
any  rate  the  minor  fluctuations  of  market-changes, 
has  no  validity  whatever. ^ 

Once  expel  from  the  mind  the  idea  that  value 

1  Still  more  fallacious  is  the  signification  which  so  hard- 
headed  a  thinker  as  Professor  Iladley  adopts,  identifying  value 
with  "  a  proper  and  legitimate  price  as  distinct  from  an  unfair 
and  illegitimate  one." 

"The  price  of  an  article  or  service,"  he  says,  "in  the  ordi- 
nary commercial  sense,  is  the  amount  of  money  which  is  paid, 
asked,  or  offered  for  it.  The  value  of  an  article  or  service  is 
the  amount  of  money  which  may  properly  be  paid,  asked,  or 
offered  for  it."  —  Hadley's  Economics,  p.  92. 

Now  this  involves  a  double-barrelled  error.  First,  whatever 
value  is,  it  is  not  "an  amount  of  money,"  though  it  may  be 
measured  by  an  amount  of  money.  Secondly,  the  idea  that  it 
is  a  "proper  "  or  "legitimate  "  price  involves,  as  indeed  Hadley 
admits,  a  reference  to  some  ethical  standard  which  he  does  not 
attempt  to  establish.  There  is  no  justification  whatever  for 
assigning  to  value  (exchange-value)  any  more  permanency 
than  attaches  to  price.  The  value  of  any  stock  of  goods  (the 
quantity  of  other  goods  they  will  exchange  for)  will  vary  with 
everything  that  affects  the  market-price. 


64  THE  ECONOMICS   OF  DISTRIBUTION. 

is  an  inherent  quality  or  enjoys  any  more  perma- 
nency than  does  market-price,  and  it  becomes 
evident  that  the  study  of  price-change  is  the 
surest  approach  to  the  true  understanding  of 
value.  1 

§  5.  The  one-sided  theorists  who  have  made 
value  dependent  either  solely  upon  "  cost "  of 
production  or  upon  "utility,"  commit  a  similar 
error.  Though  they  formally  describe  value  as 
a  relation  between  commodities,  they  realise  it  as 
a  property  attaching  to  commodities.  Those  who 
attribute  to  cost  of  production  the  cause  or  deter- 
mination of  value,  realise  goods  as  possessing  value 
in  the  shape  of  the  productive  power  of  labour  and 
capital  which  has  been  used  in  making  them,  and 
are  thus  driven  to  deny  the  direct  influence  on 
value  of  causes  which  do  not  operate  through 
cost  of  production.  The  Utility  School  similarly 
comes  to  regard  and  speak  of  value  as  a  property 
or  force  stored  in  goods,  by  reason  either  of  the 
direct  satisfaction  they  can  afford,  or  because  of 
their  contribution  toward  the  production  of  goods 
which  give  a  certain  quantity  of  satisfaction,  only 
admitting  causes  from  the  cost  side  in  so  far  as 
they  are  seen  to  operate  upon  utility. 

Considered  in  a  broad,  historical  light,  the  two 
opposed  tlieories  of  value    are  of    great  interest. 

1  Bohm-Bawerk,  who  insists  on  distinguishing  value  and 
price  as  conceptions,  admits  tliat  "  tlie  laws  of  these  two 
coincide."     (Positive  Theory  of  Capital,  i^.  132.) 


LONG-PERIOD  PRICES  AND    VALUE.         65 

Economics,  after  it  left  the  liberal  hands  of  Adam 
Smith,  was  moulded  into  the  structure  of  a  sci- 
ence of  commerce  by  the  classical  economists  with 
Ricardo  at  their  head.  The  characteristic  note  of 
this  school  was  to  regard  the  production  of  com- 
mercial wealth  as  the  end  or  final  cause  of  industry: 
to  this  intent  they  twisted  the  whole  terminology 
of  political  economy.  Consumption  itself  was 
justified  as  a  means  to  an  end  —  the  furtherance 
of  production.  1  Not  merely  was  the  theorj'^  of 
Consumption  or  Human  Satisfaction  left  wholly 
undeveloped  by  this  school,  but  it  was  equally 
germane  to  their  conception  of  the  science  to 
ignore  utility  and  to  consider  cost  of  production 
as  the  cause  of  value.  This  is  essentially  the  com- 
mercial point  of  view.  The  commercial  man  has 
no  direct  concern  with  the  utility  of  his  goods — 
that  is  the  purchaser's  lookout  Qcaveat  emptor!')  ; 
his  chief  business  is  to  look  after  the  cost  of  pro- 
duction and  the  sale.  The  treatment  of  labour  as 
a  mere  commodity  —  one  "  cost  "  of  production  — 
belongs  to  the  same  attitude.  On  the  other  hand, 
Jevons  and  his  fellow-thinkers  in  England,  Austria, 
and  America  assign  utility  as  cause  or  determi- 
nant of  value,  because  they  have  abandoned  the 
commercial  standard  and  substituted  a  "  human  " 
standard.     Economic   activities   are   regarded   as 

1  The  free  trade  theory  did,  indeed,  formally  recognise  the 
supremacy  of  the  interests  of  the  consumer,  but  it  never  affected 
the  main  structure  or  the  terminology  of  political  economy. 


66  THE  ECONOMICS   OF  DISTRIBUTION. 

contributing',  not  to  "  business, ''  but  to  satisfac- 
tion :  the  end  is  no  longer  production,  but  con- 
sumption. So,  just  as  it  was  natural  for  the 
commercial  economist  to  look  upon  "  costs "  as 
a  force  generated  in  various  processes  of  produc- 
tion, accumulating  and  vested  in  goods  as  making 
them  "  valuable,"  so  it  was  natural  for  those  who 
look  down  tlie  line  of  industrial  processes  from  the 
other  end,  from  consumption,  to  take  the  con- 
sumer's test  of  the  valuable  —  utility  —  to  refer 
it  back  as  a  property  potentially  existing  in  differ- 
ent classes  of  commercial  goods  which  are  on 
their  way  to  blossom  into  really  useful  goods 
when  they  reach  the  consumer. 

Stand  at  one  end  of  the  stream  of  industry,  you 
see  goods  gathering  cost  as  they  pass  from  process 
to  process  in  production,  and  then  cost  appears 
to  be  the  value  which  is  growing  :  stand  at  the 
other  end,  value  seems  only  to  emerge  from  the 
contributions  which  productive  processes  make 
toward  the  supply  of  consumables,  and  to  con- 
sist of  nothing  else  than  this  utility  of  consum- 
ables reflected  back  upon  the  earlier  processes  —  a 
potentiality  of  satisfaction. 

Now  both  these  views  of  value  are  due  to  an 
almost  materialistic  conception  of  value  as  a 
property  or  force  stored  in  material  forms  of 
wealth  and  transmitted  from  one  end  or  other 
of  the  chain  of  industry.  By  an  unwise  depar- 
ture from  the  actual  operations  of  the  market,  they 


LONG-PERIOD  PRICES  AND    VALUE.        67 

have  developed  an  abstraction  as  unreal  as  the 
"  oddity  and  quiddity  "  of  the  mediaeval  school- 
men. Like  the  latter,  too,  they  have  developed  a 
dogmatism  in  the  assumption  of  their  theory, 
which  would  be  ridiculous  if  it  were  not  so  in- 
jurious. Of  course  all  holders  of  a  "cost"  theory 
of  value  admit  that  valuable  things  must  be  use- 
ful, but  this  utility  is  only  a  condition,  while  cost 
is  the  efficient  cause  :  "  utility "  men  allow  that 
cost  affects  the  value  of  all  freely  produced  goods, 
but  they  maintain  cost  is  the  condition,  utility  the 
efficient  cause. ^ 

§  6.  Now  if,  leaving  abstractions,  we  turn  to 
shifts   of   actual   prices  and   recognise   that  with 

1  Admitting,  as  Bohm-Bawerk  does,  that  "  for  the  emergence 
of  value  there  must  be  scarcity  as  well  as  utility,  —  not  absolute 
scarcity,  but  scarcity  relative  to  the  demand  for  the  particular 
class  of  goods,"  —  it  is  hard  to  understand  why  he  should  refuse 
to  scarcity  (and  through  scarcity  to  cost)  an  independent  in- 
fluence as  a  direct  determinant  of  value.  He  does  not  really 
dispose  of  this  independent  influence  by  making  economic 
scarcity  "  relative  to  the  demand  ";  for  while  change  of  demand 
may  undoubtedly  affect  the  "relative"  scarcity,  changes  pro- 
duced by  natural  causes  or  human  arts,  stimulated  by  no  change 
of  demand,  may  also  affect  this  relative  scarcity.  It  is  difficult 
to  comprehend  why  a  change  in  the  value  of  a  stock  of  wheat, 
due  to  a  favourable  season  or  a  new  railway,  should  be  attrib- 
uted to  demand,  which  has  either  not  changed,  or  the  change 
of  which  has  been  cleai'ly  consequent  upon  an  enlargement  of 
supply.  Yet  if  "scarcity"  thus  affected  may  be  legitimately 
regarded  as  a  true  determinant  of  change  of  value,  why  may 
not  "scarcity"  and  the  cost  factor  behind  it  rank  as  a  true 
determinant  of  value  ?  (Positive  Theunj,  Bk.  Ill,  Ch.  II, 
p.  135.) 


68  THE  ECONOMICS   OF  DISTRIBUTION. 

each  price-change  the  value  of  a  stock  of  goods 
is  changing,  we  perceive  that  value  is  affected, 
and  directly  affected,  by  forces  proceeding  from 
either  side,  and  that  this  distinction  between 
causes  and  conditions  of  value  has  no  ultimate 
validity. 

Only  by  turning  to  the  actual  play  of  economic 
forces  in  a  market  can  we  perceive  the  or- 
ganic relation  between  cost  and  utility  operating 
through  supply  and  demand,  which  is  required 
to  establish  the  truth  that  value  is  determined  by 
the  interaction  of  the  two.  It  is  the  most  ser- 
viceable achievement  of  Professor  Marshall  to 
have  clearly  established  the  equality  and  the  in- 
terdependence of  cost  and  utility  as  the  deter- 
minants of  value.  This  he  did  by  working  out 
through  supply  curves  and  demand  curves  the 
laws  of  the  regulation  of  prices.  With  the  theory 
of  value  as  distinct  from  that  of  prices  he  has 
dealt  very  briefly,  but  his  brief  treatment  con- 
tains a  refutation  of  the  Jevonian  theory  of  "final 
utility  "  as  crushing  as  even  Mr.  Hyndman  could 
desire.  With  characteristic  academic  modesty 
Professor  Marshall  has  placed  this  criticism  of 
Jevons  in  a  small  print  note,  the  very  title  of 
which  is  but  a  slight  indication  of  its  matter.  It 
is  called  a  "Note  on  Ricardo's  Theory  of  Value  " ; 
but  though  it  contains  an  exposure  of  the  insuffi- 
ciency of  tlie  cost  theory,  its  chief  importance 
consists  in  its  brief  and  absolutely  conclusive  ref- 


LONG-PERIOD  PRICES  AND    VALUE.        69 

utation  of  the  syllogism  into  which  Jevons  some- 
what rashly  cast  his  doctrine  of  value.  The  fact 
that  many  students  of  economics  still  speak  of 
themselves  as  Jevonians  in  their  interpretation 
of  value,  I  can  only  explain  by  supposing  that 
Professor  Marshall's  note  has  escaped  their  atten- 
tion. As  Professor  Marshall  points  out,  Jevons, 
with  the  ingenuousness  of  the  professional  logi- 
cian, provides  his  own  refutation.  His  theory 
that  the  value  of  a  supply  of  goods  is  determined 
by  the  final  utility,  i.e.  the  utility  which  attaches 
to  the  least  serviceable  partion  of  the  supply  which 
is  already  consumed,  he  sums  up  in  the  following 
syllogism  :  — 

"  Cost  of  production  determines  supply, 
Supply  determines  final  degree  of  utility. 
Final  degree  of  utility  determines  value."  ^ 

Now,  setting  on  one  side  the  careless  and  inac- 
curate statement  that  cost  of  production  deter- 
mines supply,  whereas  final  cost  is  the  immediate 
determinant,  this  syllogism,  as  Marshall  points  out, 
really  gives  away  the  most  distinctive  feature  in 
Jevons's  treatment.  Jevons  wishes  to  insist  that 
final  utility,  not  final  cost,  is  the  real  controlling 
force.  But  his  syllogism,  though  alleging  that 
value  is  directly  dependent  on  final  utility,  shows 
that  final  utility  is  controlled  by  final  cost,  so  that 
the  latter  is  made,  after  all,  the  master. 

1  Principles  (2  ed.),  Bk.  IV,  Ch.  XV. 


70  THE  ECONOMICS   OF  DISTRIBUTION. 

The  whole  statement,  as  Marshall  shows,  can 
be  utterly  upset  by  inverting  Jevons's  syllogism 
and  substituting  the  following,  which  is  "  rather 
less  untrue  "  :  — 

"  Utility  determines  the  amount  that  has  to  be  supplied, 
The  amount  that  has  to  be  supplied  determines  cost  of 

production, 
Cost  of  production  determines  value." 

The  fallacy  of  attributing  the  determination  of 
value  (or  price)  to  final  cost  or  to  iinal  utility  is 
one  and  the  same.  Final  utility  cannot  be  the 
ultimate  determinant  of  value,  because  final  utility 
will  depend  upon  how  much  is  bought,  and  how 
much  is  bought  will  depend  upon  the  quantity 
that  is  offered  at  different  prices,  and  this  in  its 
turn  depends  upon  final  cost.  So,  conversely, 
final  cost  cannot  determine  value,  because  the 
cost  of  producing  the  last  portion  of  supply  will 
depend  largely  upon  how  much  is  produced,  and 
that  will  depend  on  the  effective  demand  at  dif- 
ferent prices,  or,  ultimately,  on  the  final  utility 
attending  different  quantities  of  consumption. 

Professor  Marshall  has  summed  up  the  matter 
with  perfect  accuracy  by  comparing  the  two  in 
their  action  to  the  blades  of  a  pair  of  scissors. 
"  When  one  blade  is  held  still,  and  the  cutting  is 
effected  by  moving  the  other,  we  may  say  with 
careless  brevity  that  the  cutting  is  done  by  the 
second ;  but  the  statement  is  not  one  to  be  made 
formally  and  defended  deliberately." 


LONG-PERIOD  PRICES  AND   VALUE.        71 

The  fact  is,  that  both  sides  commonly  imported 
a  particular  concept  into  value  which  begged  the 
question.  The  commercial  economist  saw  that 
goods  fetched  a  high  price  because  they  were  dif- 
ficult to  get  hold  of  (scarce)  or  "  costly  "  to  make  ; 
the  humane-minded  economist  found  the  common 
meaning  of  value  more  akin  to  utility.  The  same 
transaction  is  often  regarded  in  common  life 
by  two  parties  with  the  same  difference  of  view. 
Take  the  case  of  the  cab-runner,  who  demands  a 
shilling  for  carrying  your  box  into  the  house.  He 
values  his  action  at  a  shilling,  looking  at  it  from 
the  cost  side ;  he  has  run  two  miles  against  a  horse, 
with  the  risk  of  being  refused  the  job  after  doing 
all  this  work ;  a  shilling  is  not  an  outrageous 
charge  for  his  effort  and  his  risk.  On  the  other 
hand,  you  would  almost  as  soon  as  not  take  the 
exercise  of  carrying  your  own  box  up  the  steps,  so 
the  actual  good  you  get  from  the  cab-runner  is 
very  small  indeed.  Or,  again,  take  the  case  of  Mr. 
Beecham,  who  sells  us  pills  which  he  perhaps 
correctly  observes  are  "  worth  a  guinea  a  box  "  to 
us,  and  yet,  with  a  rare  spirit  of  self-denial,  con- 
sents to  take  Is.  10c?.,  regulating  the  price  rather 
by  consideration  of  the  cost  to  him  than  the  utility 
conferred  on  us. 

The  confusion  which  has  thus  attached  to  value 
arises  almost  inevitably  when  a  popular  abstrac- 
tion is  taken  into  scientific  terminology. 

§  7.    Another  curious  instance  of  the  inveterate 


72         THE  ECONOMICS   OF  DISTRIBUTION. 

one-sidedness  of  the  adherents  of  final  utility  in 
recent  times  is  furnished  by  the  use  which  Bohm- 
Bawerk  and  others  of  his  school  have  made  of  the 
term  "subjective  value  "  in  seeking  to  identify  it 
with  the  old  use  value.  "  It  is  important,"  writes 
B6hm-Bawerk,i  "that  we  give  right  names  to 
those  things  which  tradition  has  handed  down  to 
us  under  the  inadequate  designation  of  use  value 
and  exchange  value.  The  two  groups  of  phe- 
nomena, to  both  of  which  ^  popular  usage  has 
given  the  ambiguous  name  'value,'  we  shall  dis- 
tinguish as  value  in  the  subjective  and  value 
in  the  objective  sense.  Value  in  the  subjective 
sense  is  the  importance  which  a  good,  or  a  complex 
of  goods,  possesses  with  regard  to  the  well-being 
of  a  subject."  And  this  "  well-being  "  he  proceeds 
to  identify  with  the  "  satisfaction  of  a  want."  Now 
by  thus  identifying  subjective  with  use  value  he 
has  begged  a  most  important  issue.  I  may  put 
the  matter  in  the  form  of  a  question  and  ask,  Why 
should  not  the  term  "  subjective  value  "  be  applied 
to  the  whole  subjective  or  human  facts  which  lie 
behind  objective  or  exchange  value — facts  which 
relate  not  only  to  the  utility  of  the  good  possess- 
ing the  exchange  value,  but  to  its  cost  as  well  ? 
The  forces  which  directly  operate  in  determining 
objective  value  proceed  both  from  costs  and  from 
utility.  Why,  then,  should  the  term  "  subjective 
value  "  reflect  only  the  subjective  aspects  of  those 
1  Positive  Theory  of  Capital,  "Bk.  Ill,  CIi.  T. 


LONG-PERIOD  PBICES  AND   VALUE.         73 

which  proceed  from  utility  ?  The  "  well-being  of 
a  subject"  is  just  as  much  concerned  with  mini- 
mising costs  as  in  maximising  utility.  Subjective 
value,  if  it  is  to  have  any  proper  or  intelligible  cor- 
respondence to  objective  value,  should  express 
the  relation  of  subjective  cost  to  subjective  utility. 

It  is  perhaps  not  curious  that  Bohm-Bawerk 
should  proceed  to  mate  this  error  by  giving  also 
the  same  one-sided  interpretation  to  objective 
value  by  which  he  says  is  meant  "  the  power  or 
capacity  of  a  good  to  procure  some  one  objective 
result.  In  this  sense  there  are  as  many  kinds  of 
value  as  there  are  external  results  with  which 
man  may  be  connected.  There  is  a  nutritive 
value  of  food,  a  heating  value  of  wood  and  coal, 
a  fertilising  value  of  manures,  a  blasting  value  of 
explosives,  and  so  on."  ^  Now  there  is,  perhaps, 
no  sufficient  reason  why  Bohm-Bawerk  should  not 
apply  the  term  "  objective  value  "  to  these  objec- 
tive utilities.  But  when  he  seeks  to  identify  it, 
as  he  does  in  the  paragraph  just  quoted,  with 
exchange  value,  I  can  only  say  that  he  is  depart- 
ing from  the  meaning  consistently  and  universally 
accorded  to  that  term  by  past  economists. 

The  fact  is  that  in  his  preliminary  process  of 
defining  objective  and  subjective  value  he  has 
identified  them  with  objective  and  subjective 
utility,  denying  the  validity  of  all  "  cost "  consid- 
erations. This,  occurring  as  it  does  in  the  opening 
1  p.  131. 


74  THE  ECONOMICS   OF  DISTRIBUTION. 

pages  of  a  treatment  of  value,  is  sheer  '■'■petitio 
principii.'''' 

§  8.  But,  though  in  the  specific  problem  of  direct 
determination  of  value  final  or  marginal  utility 
exercises  no  power,  the  like  of  which  is  not  exer- 
cised by  final  or  marginal  cost,  there  is  a  sense  in 
which  a  superior  control  may  be  claimed  for  utility 
as  "  causa  causans."  Were  "  economics  "  expanded 
into  a  broader  science,  which  should  take  cogni- 
zance of  all  forms  of  vital  wealth,  the  economic 
antimony  of  production  and  consumption  would  be 
merged  in  the  deeper  unity  to  which  biology  and 
ethics  testify,  when  they  insist  that  work,  or  pro- 
duction, can  be  as  genuine  and  vital  a  source  of 
satisfaction  as  consumption  itself.  From  such  a 
standpoint  Bohm-Bawerk's  insistence,  that  the 
causal  connection  "  runs  in  an  unbroken  chain 
from  value  and  price  of  products  to  value  and 
price  of  costs,"  appears  defective,  for  we  perceive 
"utility"  or  other  vital  satisfaction  emerg- 
ing directly  from  processes  of  production  in  the 
finer  arts  and  handicrafts. 

A  really  philosophical  analysis  from  the  physio- 
logical or  the  psychological  standpoint  would 
seem  to  bring  together  into  such  close  organic 
relation  the  processes  of  productive  and  con- 
sumptive work  and  enjoyment,  that  neither  in 
the  purely  biological  nor  in  the  conscious  realms 
could  the}^  be  severed  or  priority  of  importance 
accorded  to  one  of  them. 


LONG-PERIOD  PRICES  AND    VALUE.        75 

But  taking  economics  within  the  limits  generally 
assigned  to  it,  the  Utility  Schools  are  entitled  to 
ignore  these  considerations,  and  to  insist  that  the 
theory  of  value  is  not  concerned  with  the  ultimate 
rationale  of  function  and  fruition,  effort  and 
satisfaction,  but  only  with  such  pains  of  produc- 
tion and  pleasures  of  consumption  as  actually 
figure  in  present  human  estimates  of  value.  So, 
any  labour,  which  is  itself  a  joy,  and  is  recognised 
as  such, .  involves  no  economic  "  cost,"  and  such 
"  goods  "  as  it  produced  would,  unless  the  labour 
were  hampered  by  scarcity  of  material,  possess 
no  "value,"  but  would  be  "free"  goods.  The 
utility  theorist  rightly  urges  that,  since  economic 
costs  are  ex-hypothesi  "  painful,"  they  cannot 
be  regarded  as  undergone  for  their  own  sake,  but 
only  as  means  to  the  end  of  attaining  some  utility. 
Thus  the  conscious  motive  force  which  directs 
the  volume  of  productive  force  emanates  from  the 
demand  of  consumers,  and  utility  of  consump- 
tive goods  becomes  the  ultimate  cause  why  value 
attaches  to  any  stock  of  productive  goods. 

We  may  even  affirm  that  from  utility,  through 
demand,  proceed  the  very  forces  which  direct  and 
evoke  costs,  drawing  industrial  energy  into  the 
right  channels  and  stimulating  those  very  im- 
provements in  organisation  and  the  industrial 
arts  which  subsequently  appear  as  chief  causes  of 
changes  of  value  from  the  cost  side. 

But  though  utility  thus  figures  as  the  final  cause 


76  THE  ECONOMICS   OF  DISTRIBUTION. 

of  value,  it  is  not  rightly  taken  as  the  sole  efficient 
cause  or  as  the  sole  determinant  of  quantity  of  value 
attaching  to  a  stock  of  goods.  The  distinction 
here  made  is  not  a  barren  one.  The  economic 
problem  of  value  is  one  in  which  we  are  rightly 
concerned,  not  with  final,  but  with  efficient,  causes, 
and  the  mistake  of  the  Utility  School  is  that  they 
substitute  the  former  treatment  for  the  latter. 
As  a  direct,  independent,  efficient  cause  of  the 
value  of  a  given  stock  of  goods,  cost  ranks  on  a 
level  with  utility.  The  attribution  of  final  cau- 
sality to  utility  has  no  serviceable  bearing  on  the 
problem  of  determination  of  values  and  prices. 
Bohm-Bawerk  sometimes  seems  to  feel  this,  and  is 
driven  to  claim  for  utility  a  superior  power,  not 
only  as  final,  but  as  efficient,  cause,  insisting,  for 
instance,  that  value  "  runs  from  iron  goods  to  iron, 
and  not  conversely."  Now  the  iron  goods  ap- 
pear to  impose  value  upon  iron  and  to  determine 
the  "  how  much  "  of  the  value,  only  so  long  as  we 
ignore  the  influence  of  costs  (through  scarcity  of 
supply)  upon  the  iron  goods.  When,  however, 
that  influence  is  taken  into  consideration,  the 
value  of  the  supposed  sole  determinant  is  seen 
to  be  itself  determined  partly  from  the  cost 
side.  In  other  words,  the  flow  of  accumulating 
costs  drawn  from  the  iron  and  coal  is  perceived 
to  be  just  as  much  an  efficient  cause  of  the  value 
of  the  iron  goods  as  the  utility  of  the  latter  is  of 
the  value  of  the  iron.     So  that  even  were  we  to 


LONG-PERIOD  PRICES  AND    VALUE.        77 

admit  that  the  value  of  iron  was  imputed  from  the 
value  of  the  iron  goods,  cost  is  not  banished  as  an 
efficient  cause  of  the  value  of  iron.  The  somewhat 
intricate  and  complex  reasoning  by  which  Bohm- 
Bawerk  has  sought  to  get  rid  of  costs  as  direct  and 
separate  influences  on  value  of  productive  goods, 
receives  more  detailed  consideration  in  an  appendix 
to  this  chapter.  The  breakdown  of  the  attempt 
to  repudiate  the  separate  efficient  causal  influ- 
ences of  "  costs  "  in  determining  the  value  of  con- 
sumptive goods  and  productive  goods  is  there 
made  manifest. 

§  9.  A  brief  summary  of  the  actual  relations 
which  subsist  between  costs  and  utility  and  be- 
tween the  value  of  productive  and  consumptive 
goods  will  take  the  following  shape  :  — 

Taking  industry  as  "a  going  concern,"  and 
bearing  in  mind  the  present  condition  of  the  in- 
dustrial arts  in  the  several  processes,  we  shall  find 
that  a  definite  quantitative  relation  exists  between 
the  amount  of  value  of  the  productive  goods  and 
instruments  at  the  several  stages,  and  the  amount 
of  value  of  the  consumptive  goods  which  issue 
from  them.  If  we  consider,  as  we  reasonably 
may,  consumptive  goods  as  the  conscious  goal 
of  industry,  it  will  appear  that  productive  goods 
receive  their  value  as  means  to  an  end,  and  that 
the  amount  of  this  value  is  dependent  upon  the 
amount  of  value  of  the  consumptive  goods.  If, 
then,  the  value  of  these  consumptive  goods  could 


78  THE  ECONOMICS   OF  DISTRIBUTION. 

be  lightly  considered  to  be  determined  by  their 
final  utility,  this  latter  would  be  placed  in  the  posi- 
tion of  the  true  determinant  of  all  values.  But 
even  Bohm-Bawerk,  when  confronted  with  the 
question,  admits  that  the  final  utility  of  consump- 
tive goods  is  itself  determined  by  the  relations  be- 
tween "wants  and  provision."  Now  behind  "pro- 
vision "  or  "  supply "  stands  the  force  of  costs. 
So  that  where  the  value  of  consumptive  goods  seems 
to  determine  the  value  of  productive  goods,  it  is 
not  more  because  the  final  utility  of  consumptive 
goods  determines  that  of  productive  goods  than 
because  the  final  costs  of  productive  goods  have 
already  determined  the  costs  of  the  consumptive 
goods,  and  so  helped  to  determine  the  very  value 
which  appears  to  be  reflected  back.  If  we  choose 
to  disregard  the  "  suction  "  exercised  by  demand 
for  consumptive  goods  and  to  follow  the  mere 
"  flow "  of  the  industrial  stream  from  the  early 
processes  onward  toward  consumptive  goods,  it 
seems  equally  plausible  to  represent  the  value  of 
productive  goods  as  determining  that  of  con- 
sumptive goods. 

In  fact,  the  flow  of  the  accumulative  force  of 
utilities  and  costs  is  in  opposite  directions.  So 
far,  then,  as  the  actual  determination  of  the  value 
of  a  stock  of  productive  goods  is  concerned,  we 
must  insist  that  there  are  two  sets  of  efficient 
causes,  —  tliose  operating  through  final  utility, 
derived  from  and  dependent  on  the  final  utility 


LONG-PERIOD  PRICES  AND    VALUE.         79 

of  consumptive  goods,  and  those  operating  through 
final  costs  (except  where  natural  scarcity  takes 
the  place  of  costs). 

§  10.  While,  therefore,  in  a  scientific  physiology 
of  industry,  final  utility  is  of  supreme  significance 
as  indicative  of  the  true  source  of  industrial  life, 
the  motor  power  which  flows  from  the  effective 
demand  of  consumers  of  commodities,  and  which  by 
the  pressure  of  its  "final"  or  "marginal"  activity 
directs  and  attracts  the  requisite  productive  pow- 
ers in  every  channel  of  industry,  it  cannot  rightly 
take  the  place  which  is  claimed  for  it  in  the  spe- 
cific problem  of  the  determination  of  the  value  of 
any  stock  of  useful  goods  at  any  point  of  the 
industrial  stream.  Our  setting  of  the  problem 
of  price-change  and  of  value,  concerned  as  it  is 
with  "efficient"  causes  must,  therefore,  hold  the 
balance  equal  between  final  utility  and  final  cost. 

To  achieve  such  a  task  careful  terminology  is 
essential,  and,  in  order  to  clear  our  mind  as  much 
as  possible  from  controversial  misconceptions,  I  pro- 
pose, first,  to  substitute  for  the  term  "  value"  a  gen- 
erally admitted  equivalent,  which  the  discussions 
of  the  Austrian  School  have  brought  to  the  front. 

The  value  of  a  supply  or  of  an  article  of  supply 
means  the  "  economic  importance  "  attaching  to 
it.  There  are  two  advantages  in  substituting 
the  term  "  importance  "  for  value. ^     In  the  first 

1  Menger  is,  I  think,  the  first  to  identify  value  with  "im- 
portance," in  a  distinct  definition  of  the  term. 


80  THE  ECONOMICS   OF  DISTRIBUTION. 

place,  it  is  prima  facie  impartial,  so  far  as  a 
theory  of  value  is  concerned,  whereas  the  term 
"value,"  from  common  association,  leans  toward 
utility.  Secondly,  it  gets  rid  of  the  notion  of 
"  value  "  as  a  quality  or  property  of  goods,  and 
gives  emphasis  to  the  true  notion  of  it  as  an  aspect 
or  relation.  This  impartiality,  indeed,  is  not  quite 
absolute,  for  we  find  Austrian  economists,  in 
their  adoption  of  the  term,  already  imputing  into 
it  a  bias  toward  utility  as  the  source  of  "  impor- 
tance."^ 

If,  however,  taking  the  following  table  of  ter- 
minology, we  approach  the  central  conception  of 
economic  importance  in  relation  to  the  concrete 
problem  of  determination  of  price,  the  equilibra- 
tion of  prices  from  the  cost  and  the  utility  sides 
will  be  established  beyond  all  controversy. 

"  Die  Bedeutung,  welche  concrete  Giiter  oder  Giiterquanti- 
taten  ftir  uns  dadurch  erlangen,  dass  wir  in  der  Befriedigung 
unserer  Bediirfnisse  von  der  Verf iigung  iiber  dieselbeu  anhangig 
zu  sein  uns  bewusst  sind."     (GritndzUge,  p.  78.) 

This  is  paraphrased  by  Professor  Smart  as  follows,  "Value 
is  the  importance  which  a  good  acquires  as  the  recognised  con- 
dition of  something  that  makes  for  the  well-being  of  a  subject, 
and  would  not  be  obtainable  without  the  good."  (Introduction 
to  the  Theory  of  Value,  p.  14.) 

1  Bolnn-Bawerk,  for  example,  proposes  to  define  value  "  un- 
ambiguously and  exactly,"  as:  " That  importance  wliich  goods 
or  complexes  of  goods  acquire,  as  the  recognised  condition  of  a 
utility  which  makes  for  the  well-being  of  a  suT)ject,  and  would 
not  be  obtained  without  them."  {Positive  Theory,  Bk.  Ill, 
Ch.  II.) 


o 


•< 


o  s 

CO    ?2 


LONG-PERIOD  PRICES  AND   VALUE.         81 

g  The   importance  or  value  attaching 

g^  p,  to  a  stock  of   goods    changes    directly 

I  with  any  change  in  the  relative  rate  of 

^o    to  supply  and  demand.     But  supply  and 

p '     'S  demand,  in  order  to  be  economic  forces, 

BS  "p,  in  order  to  affect  importance,  must  be 

W^  oj  governed  by  certain  forces  behind  them. 

®  A  supply  infinite  or  indefinitely  large 

g     ".§  has   no   economic  significance.      Com- 

>    Uq  parative    scarcity    is    the    governor    of 

§      4  supply.      Similarly,    demand    receives 

g       g  its    economic    significance    and   power 

«      Q  from  effective  desire  (a  willingness  and 

^   g  I  ability  to  give  something  in  order  to 

g  I  !- J  g^t).      Just  as  there   is  no   economic 

g    ph    >■  supply    of    free    goods    because    there 

I  exists  no  scarcity,  so  there  is  no  eco- 

a  nomic  demand  for  them,  because  there 

eg  is  no  willingness  to  give  something  to 

I,  get  them.     Effective  desire  is  in  effect 

g  a  "scarcity"  on  the  demand  side. 

c»  Scarcity   of  suppl}^   itself   is    condi- 

^  -j/^  tioned:    sometimes    by    a    restriction, 

o       o  which  may  be  natural,  as  in  the  case 

a    ^'B  of  certain  kinds  of  land ;  or  the  nroduct 

of  circumstances,  as  the  scarcity  of  food 

in  a  siege,  or  the  scarcity  due  to  an 

o  organised   corner    or   syndicate.      The 

o§  scarcity  of   "old    masters"    etc.,    may 

52  also  be  resrarded  as  "natural." 


c6   O) 


82  THE  ECONOMICS   OF  BISTBIBUTION. 

In  most  goods,  however,  scarcity  is  due  to  the 
fact  that  human  costs  must  be  incurred  to  pro- 
duce a  supply.  How  far  the  fact  that  human 
effort  is  required  to  produce  goods  will  make 
them  scarce,  depends  very  largely  upon  the  rela- 
tion of  human  effort  to  natural  sources  of  supply. 
Where  there  is  some  natural  limit  of  good  or  easily 
accessible  material,  more  human  effort  must  be 
expended  in  each  increase  of  supply. 

Here  scarcit}'-  is  apt  to  assert  itself  and  forces 
rising  importance  to  press  from  the  cost  side. 
Where  there  is  abundant  access  to  natural  sources 
of  supply,  less  human  effort  may  be  expended  in 
each  increase  of  supply.  Here  the  pressure  of 
scarcity  is  abated,  and  the  forces  operating  on 
supply  make  for  a  reduced  value  or  importance 
in  each  article.  Here  we  have  the  familiar  Laws 
of  Increasing;  and  Diminishino-  Returns. 

Turning  to  the  demand  side,  we  see  a  similar 
mechanism  of  economic  forces.  Effective  desire 
regulates  demand  in  the  same  way  in  which  scar- 
city regulates  suppl3\  Effective  desire  means 
desire  backed  by  purchasing  power;  it  is  the  pro- 
duct of  two  factors,  a,  human  utility,  or,  more 
strictly  speaking,  the  craving  for  satisfaction 
arising  from  utility,  and  /S,  purchasing  power. 

Human  utility  has  to  demand  the  same  relation 
that  human  cost  has  to  suppl}^  The  economic 
forces  wliich  operate  on  cost  are  the  arts  of  pro- 
duction,    'iliu  practice  of  tlie  arts  of  production, 


LONG-PERIOD  rRICES  AND    VALUE.         83 

otherwise  efficiency  of  production,  will  depend  in 
part  upon  scientific  considerations,  the  amount 
of  knowledge  of  the  industrial  arts,  partly  upon 
the  character  or  quality  of  the  men  who  exercise 
these  arts,  their  individual  and  their  collective 
power  to  avail  themselves  of  the  knowledge  of  the 
arts.  Given  the  same  absolute  knowledge  of 
natural  forces  in  relation  to  matter  and  of  the 
modes  of  working,  differences  of  physique,  race, 
climate,  social  and  political  institutions,  and  a 
variety  of  other  influences  will  affect  the  actual 
cost  of  producing  a  given  quantity  of  wealth. 
Again,  the  effectiveness  of  the  practice  of  indus- 
trial arts,  as  we  have  seen,  is  always  qualified  by 
the  limits  imposed  by  nature  upon  the  supply  of 
matter  and  natural  energy. 

Closely  analogous  in  working  are  the  forces 
which  play  upon  demand.  As  the  arts  of  pro- 
duction stand  behind  cost,  so  the  arts  of  con- 
sumption stand  behind  utility  or  satisfaction. 
Any  given  stock  of  valuable  goods  will  of  course 
depend,  for  the  real  satisfaction  they  afford,  upon 
the  degree  of  development  of  the  tastes  of  the 
consumer  and  the  habits  of  consumption  he  has 
formed.  There  is  a  skill  of  consumption  which 
rests  upon  physical  laws  relating  partly  to  the 
constituents  of  consumable  goods,  partly  to  the 
nature  of  the  consumer,  and  which  consists  in  a 
right  and  delicate  harmony  or  adjustment  of  power 
in  securing  different  kinds  and  quantities  of  con- 


84  THE  ECONOMICS   OF  DISTRIBUTION. 

sumption,  just  as  the  skill  of  production  consists 
in  the  delicate  manipulation  by  human  and  natural 
energy  of  variously  adjusted  quantities  of  raw 
material.  As  human  cost  or  effort  is  null  and 
void  in  its  contribution  to  supply,  except  so  far 
as  it  has  access  to  natural  sources,  similarly 
human  utility  or  satisfaction  is  void  unless  it 
can  find  its  means  of  expression  in  purchasing 
power.  This  latter  condition  makes  desire  an 
economically  effective  force,  just  as  limitation  of 
natural  suppl}^  makes  productive  effort  effective. 

Remove  the  limits  of  matter  and  of  natural 
forces,  and  the  cost  of  producing  any  stock  of 
goods  may  shrink  to  an  indefinitely  small  amount. 
Similarly  assume  an  infinite  amount  of  available 
income  or  purchasing  power,  and  the  smallest 
amount  of  desire  will  express  itself  in  an  indefi- 
nitely large  demand.  ^ 

§  11.  The  use  I  claim  for  this  table  is  not  merely 
that  it  suggests  a  settlement  of  disputed  termi- 
nology, but  primarily  and  chiefly  because  it  forces 
a  recognition  of  the  organic  relation  between  cost 

1  This  assignment  of  a  subjective  basis  of  value  does  not 
conflict  with  or  impair  tlie  objective  signification  which  identi- 
fies value  with  the  quantity  of  other  goods  for  which  a  good 
will  exchange.  If  we  prefer,  we  may  accept  the  distinction 
made  by  Wieser  of  objective  exchange-value  and  subjective 
exchange-value,  understanding  by  the  former  the  quantity  of 
other  goods  for  which  it  exchanges,  by  the  latter  the  importance 
assigned  to  it  by  considerations  of  scarcity  and  utility.  The 
relation  between  the  two  is,  that  the  subjective  importance  is 


LONG-FERIOD  riilCES  AND    VALUE.         85 

and  utility,  and  the  strictly  equal  or  analogous 
part  each  bears  in  determining  value. 

It  convinces  us  that  there  are  forces  constantly 
passing  from  both  sides  to  affect  the  value  or  im- 
portance of  a  stock  of  goods. 

It  rejects  the  compromise  sometimes  suggested, 
whereby  the  value  of  some  kinds  of  goods  is  said 
to  be  determined  by  cost,  the  value  of  others  by 
utility. 

There  are  doubtless  certain  goods  which  may  be 
classified  in  such  a  way  as  to  show  an  absolute 
scarcity  or  limit  of  supply,  with  regard  to  which 
all  changes  of  value  will  appear  to  be  the  product 
of  forces  from  the  side  of  demand.  Pictures  of 
old  masters,  food  in  a  siege,  are  familiar  exam- 
ples. Here  human  costs  appear  to  exercise  no 
direct  influence  in  determining  value,  which  is 
fixed  by  the  relations  between  absolute  scarcity 
and  effective  desire,  and,  since  the  latter  is  the 
only  changing  factor,  it  may  be  said  to  be  the  sole 
direct  regulator  of  the  value  of  such  goods  at  any 
given  time.  It  might  perhaps  be  urged  that  even 
in  these  cases  cost,  though  i-educed  to  a  mini- 
mum, is  not  absolutely  excluded  as  an  influence 

measured  by  the  objective  exchange-value,  which  is  expressed 
eithei'  in  terms  of  otlaer  goods,  or  more  conveniently  in  terms 
of  money  as  price.  It  is,  however,  more  accurate  to  say  that 
the  quantity  of  goods  for  which  a  good  will  exchange,  consti- 
tutes not  its  value,  but  the  measure  of  its  value,  though  that 
measure  is  itself  commonly  referred  to  an  accepted  standard  of 
money. 


86  THE  ECONOMICS   OF  DISTRIBUTION. 

on  value.  Supply-markets  are  not  absolutely- 
separate  one  from  another,  for  the  demands  which 
cause  them  to  be  classified  are  not  kept  in  water- 
tight compartments.  It  might,  then,  be  urged  that 
there  is  neither  a  supply  nor  a  demand  for  old 
masters  which  is  entirely  separate  from  the  supply 
and  demand  of  other  pictures,  or  of  art  goods  in  a 
wide  sense.  To  take  a  concrete  example,  "  copies  " 
of  old  masters  or  "spurious  "  old  masters  must  cer- 
tainly be  held  to  cater  to  the  same  tastes  as  the 
limited  supply  of  genuine  pictures,  and  may  there- 
fore rank  as  an  increase  of  "supply,"  which  will 
moderate  the  absoluteness  of  the  "  scarcity. "  Since 
"costs  "  will  operate  upon  this  portion  of  supply, 
as  in  other  "freely  produced"  commodities,  the 
influence  of  these  "costs"  will  presumably  have 
some  effect  upon  the  value  of  "old  masters." 
Similarly,  the  effective  supply  of  food  in  a  be- 
sieged city  is  not  an  entirely  inelastic  quantity; 
the  amount  of  it  which  figures  as  supply  on  any 
given  day  will  depend  upon  the  economy  with 
which  individuals  have  used  the  stocks  in  their 
possession,  and  the  high  human  "cost "  of  keeping 
food  for  a  later  period  of  the  siege  will  have  some 
influence  as  a  determinant  of  its  value.  It  is 
scarcely  possible  to  eliminate  altogether  the  in- 
fluence of  "cost"  upon  value  save  by  recourse  to 
some  impossible  hypothesis. 

In    botli    these    instances,    it    may   be    rightly 
claimed   by  tliose  who   emphasise  utility  as  the 


LONG-PERIOD  PRICES  AND    VALUE.         87 

final  cause  of  value,  that  human  desires,  operating 
through  demand,  are  the  real  forces  which  evoke 
the  "costs  "  that  are  necessary  to  break  down  the 
absoluteness  of  monopoly  by  enlarging  the  effective 
supply.  But  this  admission  of  an  ultimate  causal- 
ity assignable  to  human  desires  ought  not,  as  we 
have  shown,  to  affect  the  economic  setting  of  the 
cases.  The  influence  of  human  costs  and  natural 
scarcity  cannot  be  eliminated  as  direct  efficient 
causes  of  price  and  value,  even  by  reference  to 
extreme  and  almost  extra-economic  instances. 

But  even  if  it  be  admitted  that  human  costs  in 
such  cases  have  no  influence  on  supply,  and  so  on 
value,  the  power  of  supply  as  a  determinant  of 
value  is  still  represented  by  "scarcity."  Whether 
we  are  dealing  with  a  natural  or  an  artificial 
scarcity,  it  is  never  absolute  and  constant;  the 
material  of  every  supply  is  continually  perishing 
or  receiving  accessions,  so  that,  though  the  pres- 
sure of  demand  appears  to  be  the  sole  source'  of 
changes  of  value  and  of  price,  there  is  always 
some  slight  vital  influence  proceeding  from  the 
supply  side.  Though  one  of  the  blades  appears 
to  do  all  the  cutting,  to  adopt  Marshall's  illustra- 
tion, and  the  other  to  stand  still,  if  we  look  closely 
enough,  we  shall  see  that  the  latter  nevertheless 
moves.  Scarcity  is  never  a  mere  statical  "condi- 
tion "  of  value,  but  always  exerts  an  active  force. 

Neither  can  we  take  the  other  side  and  conclude 
with  Mill  that  the  value  of  freely  produced  goods 


88  THE  ECONOMICS  OF  DISTRIBUTION. 

is  derived  from  and  determined  by  cost.  For  pur- 
poses of  commercial  convenience  it  may  be  better 
to  compare  the  values  of  most  free  goods  by  refer- 
ence to  relative  costs  or  expenses;  for  whatever 
forces  operate  from  the  demand  side  will  be  re- 
flected in  normal  costs,  just  as  the  forces  from  the 
cost  side  will  be  reflected  in  utility.  But  the 
selection  of  costs  for  the  more  convenient  measure 
of  values  and  price-changes  must  not  be  under- 
stood to  imply  that  either  theoretically  or  prac- 
tically the  forces  operating  through  cost  are  more 
important  than  those  operating  through  utility. ^ 

Professor  Marshall,  indeed,  suggests  that  "we 
may  say  that,  as  a  general  rule,  the  shorter  the 

1  The  folly  of  recognising  two  Laws  of  Value  —  one  where 
Supply  is  limited,  another  where  it  is  capable  of  increase  —  is 
well  exhibited  in  the  controversy  which  Bohm-Bawerk  has  car- 
ried on  with  Professor  Dietzel,  in  the  pages  of  Conrad's  Jahr- 
bucher  fitr  National- Oekonomie,  during  1890-1892.  Though 
Dietzel  had  several  times  plainly  formulated  the  true  theory 
which  assigns  the  determination  of  value  neither  to  cost  nor  to 
utility,  but  to  the  relations  between  scarcity  and  utility  (cost 
being  one  source  of  scarcity),  he  weakly  abandoned  to  the 
Marginal  Utility  School  the  class  of  limited  goods,  admitting 
their  value  to  be  determined  by  marginal  utility  alone,  whereas 
he  ought  to  have  stoutly  maintained  that  though  no  "cost" 
entered  here  as  cause,  "  scarcity,"  otherwise  determined,  played 
the  same  part  as  a  determining  factor  as  in  the  case  of  freely 
produced  goods.  The  fact  that,  in  the  one  case,  the  "  scarcity  " 
is  rigid,  in  the  other,  flexible  (by  the  application  of  new  costs), 
has  no  effect  upon  the  universality  of  the  Law  of  Value,  though 
for  practical  purposes  of  measuring  change  of  value  and  of 
price,  it  throws  the  stress  upon  the  utility  side  of  the  equation. 


LONG-PEEIOD  PRICES  AND    VALUE.         89 

period  which  we  are  considering,  the  greater  must 
be  the  share  of  our  attention  which  is  given  to  the 
influence  of  demand  on  value ;  and  the  longer  the 
period,  the  more  important  will  be  the  influence 
of  cost  of  production  on  value."  ^ 

But  even  this  distinction,  sound  as  it  is  for  prac- 
tical purposes,  must  be  rejected  if  it  implies  that 
ultimately  cost  is  the  more  important  regulator  or 
determinant  of  value.  The  operation  of  a  change 
of  taste,  the  growth  of  a  new  habit  into  a  standard 
of  comfort,  will  exercise  as  strong  and  as  abiding 
an  effect  on  the  value  of  a  class  of  goods  as  any 
change  which  takes  place  in  the  method  of  pro- 
ducing these  goods. 

It  may  be  the  case  that  a  larger  number  and 
variety  of  more  enduring  forces  operate  upon 
value  from  changes  in  the  arts  and  conditions  of 
production  than  from  the  side  of  consumption, 
but  it  is  not  easy  to  establish  the  fact.  There 
are  of  course  certain  classes  of  goods  the  value  of 
which  is  more  frequently  and  more  largely  affected 
by  forces  which  come  from  one  side  or  the  other. 
"We  may  say  that  the  value  of  wheat  is  more  in- 
fluenced from  the  supply  side,  but  the  value  of 
fashionable  dress-goods  is  influenced  chiefly  from 
the  demand  side;  and  in  the  practical  considera- 
tions of  market-price  and  bargaining  these  facts 
must  receive  due  weight;  the  study  of  the  relative 
importance  of  these  different  forces  as  they  operate 
^  Econ.  ofInd.,Tp.  223. 


90  THE  ECONOMICS  OF  DISTRIBUTION. 

on  market-price  is  the  most  delicate,  the  most 
difficult,  and  the  most  practically  important  work 
of  the  modern  profit-seeker. 

Taking  the  wider  theoretic  view,  however,  an 
absolute  equality  in  the  relation  of  cost  and 
utility  toward  value  must  be  posited. 

§  12.  The  most  curious  feature  in  the  recent 
history  of  economic  theory  is  that  Jevons,  who 
perversely  insisted  in  trying  to  upset  the  cost 
theory  of  Value  by  plunging  into  an  opposite 
falsehood  of  extremes,  is  also  the  English  writer 
who  more  than  any  other  has  laid  the  true  sub- 
jective foundation  of  a  correct  analysis  of  value. 
In  his  chapter  on  "  Theory  of  Labour  "  he  works 
out  a  theory  of  the  relation  between  cost  and 
utility  for  the  individual  which  is  irrefutable. 
He  shows  exactly  how  a  worker,  engaged  in  sup- 
plying himself  with  commodities  by  his  own  efforts, 
will  accurately  balance  the  pain  or  disutility  of 
production  against  the  pleasure  or  utility  of  con- 
sumption ;  that  the  number  of  hours  he  works,  the 
intensity  he  imparts  to  his  effort,  the  distribution 
of  working  energy  over  different  kinds  of  work,  will 
be  carefully  balanced  against  the  different  amounts 
of  satisfaction  derived  from  consuming  different 
quantities  of  goods  produced  by  the  day's  labour. 

It  is,  indeed,  conclusively  shown  that  the  eco- 
nomic value  of  the  day's  product  is  similarly  and 
equally  affected  by  the  disutility  or  cost  of  pro- 
duction and  the  utility  or  satisfaction  of  consump- 


LONG-PERIOD  PRICES  AND    VALUE.         91 

tion ;  to  such  a  man  it  will  be  a  matter  of  equal 
consideration  whether  he  increases  his  day's  effort 
by  one  unit  or  reduces  his  day's  satisfaction  by 
one  unit. 

His  analysis  of  disutility  or  cost  is  similar  to 
his  analysis  of  utility  or  consumption.  He  offers 
a  complete  setting  of  the  individual  economy;  in 
reality  he  lays  down  the  true  theory  of  Value, 
which  he  misrepresents  elsewhere.  The  objec- 
tion may  perhaps  be  raised  that  the  theory  of 
'  Value  cannot  be  given  in  terms  of  the  individual 
economy,  because  no  act  of  exchange  takes  place. 
But  the  individual  problem  contains  all  the  essen- 
tial factors ;  if  we  like,  we  may  treat  the  case  as 
one  of  exchange  worked  out  between  the  two  sides 
or  selves,  —  the  idle  self,  which  shirks  effort,  the 
greedy  self,  which  seeks  satisfaction.  The  mode 
of  balance  will  be  similar,  though  more  accurate, 
than  that  established  in  an  exchange  of  commodi- 
ties between  two  bargainers.  The  strange  thing 
is  that  Jevons  does  not  apply  this  theory  of  Ex- 
change in  the  individual  to  society.  His  formal 
theory  of  the  Individual  Economy  establishes  two 
most  important  truths :  (1)  the  equal  importance 
and  the  continuous  organic  interaction  between 
final  cost  and  final  utility;  (2)  the  essentially 
subjective  nature  of  the  problem  of  exchange.^ 

1  His  analysis,  p.  189,  of  liis  Throry  of  Political  Economy,  lays 
the  foundation  of  the  subjective  treatment  of  cost  and  utility, 
which  Austrian  and  American  economists  have  built  upon. 


92        THE    ECONOMICS    OF   DISTRIBUTION. 

Yet  Jevons,  in  his  "Theory  of  Exchange," 
ignores  the  influences  which  emanate  from  cost,  or 
counts  them  as  indirect  agents  operating  through 
final  utility.  His  treatment  of  "  disutility "  in 
this  part  of  his  work  refers,  not  to  cost,  but  to 
damage  or  pain  incidental  to  certain  classes  of 
consumption. 

In  his  final  chapter,  one  imperfect  glimpse  of 
the  true  problem  emerges,  where  Jevons  affirms, 
"The  problem  of  economics  may,  as  it  seems  to 
me,  be  stated  thus:  Given,  a  certain  population* 
with  various  needs  and  powers  of  production,  in 
possession  of  certain  lands  and  other  sources  of 
material;  required,  the  mode  of  employing  this 
labour,  which  will  maximise  the  utility  of  the 
produce."  If  Jevons  had  added  the  words,  "and 
minimise  the  'disutility  '  of  producing  them,"  his 
statement  would  have  been  complete.  But  in  fact 
his  work,  as  the  work  of  all  those  who  attach 
themselves  to  utility  as  the  special  measure  and 
determinant  of  value,  is  one-sided  and  defective. 

The  perception  that  cost  and  utility,  resolved 
into  their  subjective  elements  of  effort  and  satis- 
faction, are  essentially,  organicallj^  related  in 
the  individual  economy,  must  be  followed  fciy  the 
plain  admission  of  a  similar  relation  in  the  social 
economy  which  expresses  itself  in  social  value 
and  in  price.  And  a  scientific  statement  of  value 
must  assign  a  similar  relation  to  the  forces  affect- 
ing value  from  both  sides. 


LONG-PERIOD   PRICES  AND    VALUE.         93 


Part  II. 

§  13.  This  wide  excursion  into  the  theory  of 
Value  may  seem  to  some  to  have  a  too  remote 
bearing  upon  the  more  definite  problem  of  price- 
point  and  price-change.  But  this  is  not  really 
the  case.  Until  the  precise  equality  of  final  cost 
and  final  utility  as  determinants  of  value  is  estab- 
lished, we  cannot  fully  appreciate  the  process  of 
competition  and  bargaining  which  results  in  a 
price. 

I  began  by  pointing  out  the  fact  that  behind 
the  supply,  which  figured  in  any  market,  there 
were  a  number  of  forces  relating  to  scarcity  and 
cost  of  production  in  the  wider  market,  which 
determined  the  quantity  available  at  the  diffei'cnt 
prices.  The  same  forces  bring  it  about  that  some 
portions  of  the  market  supply  are  produced  more 
cheaply  than  other  parts.  The  owners  of  the  more 
cheaply  produced  goods  would  consent,  if  neces- 
sary, to  sell  them  at  a  lower  price  than  the  owners 
of  the  more  expensive  portion  of  supply  would 
consent  to  take.  In  other  words,  the  difference 
of  price-limit,  which  we  saw  the  different  sellers 
put  upon  their  goods,  arises  from  differences  in  the 
cost  or  expense  of  producing  them.  If  the  supply 
is  thus  graded  according  to  the  cost  of  its  different 
parts,  the  price  which  is  eventually  reached  will, 
it  is  maintained,  be  such  as  only  just  to  cover  the 


94  THE  ECONOMICS   OF  DISTBIBUTION. 

expenses  of  the  most  expensive  portion.  Those 
who  lay  stress  upon  this  side  say  that  the  price  is 
determined  by  the  expense  of  producing  this  last 
part,  or  the  marginal  expenses  of  production. 
Similarly,  the  different  valuation  which  was  im- 
puted to  the  buyers  is  attributed  to  the  superior 
"effective  desire  "  which  some  exhibit  as  compared 
with  others.  The  attainment  of  the  horse  or  the 
quarter  of  wheat  will  either  satisfy  a  stronger  de- 
sire in  some  than  in  others,  or  an  equally  strong 
desire  backed  by  a  fuller  purse.  Those  who  lean 
upon  this  side  say  that  utility  (effective  desire) 
of  the  last  portion  that  is  bought  determines  the 
value  of  the  whole  supply. 

§  14.  Now  let  us  turn  to  our  diagram  of  market- 
price  and  ascertain  how  marginal  cost  and  mar- 
ginal utility  actually  express  themselves.  We 
shall  find  that  they  can  be  identified  with  the 
final  pair  before  Avhose  valuation  competition  of 
buyers  and  sellers  gives  way,  leaving  the  price- 
point  to  be  determined  by  the  bargaining  of  the 
two. 

The  competition  and  "higgling"  was  seen^  to 
result  in  five  acts  of  sale,  in  which  A,  B,  C,  D,  E, 
were  the  sellers  and  N,  O,  P,  Q,  R,  the  buyers, 
at  a  price  which  was  finally  determined  by  the 
higgling  of  a  single  pair  within  limits  imposed 
by  competition.  The  final  pair,  whose  action 
determined  the  price-limits,  and  eventually  the 

iCh.  I,  pp.  11-19. 


LONG-PERIOD  PRICES  AND   VALUE. 


95 


price,  were  seen  to  be  F,  with  a  limit-price  of  sale 
amounting  to  X21 10s.,  and  M,  with  a  limit-price  of 
purchase  amounting  to  X21.  F  is  the  one  among 
actual  sellers  whose  limit-price  is  highest.  He 
cannot  afford  to  sell  at  less  than  X21  10s.  Why? 
Because  he  reckons  that  price  will  only  just  cover 


Sellers.     Price-limits. 

II     G     F     E     I)     C     B      A 


20 


25 


20 


15 


10 


28 


22 


IT 


I      J      K     L     M     N     O     P     Q      R 

Buyers.     Price-limits. 

his  cost  of  production,  or,  more  strictly  speaking, 
will  only  give  him  the  minimum  gain  required 
from  a  single  sale.  In  other  words,  F  represents 
the  most  expensive  portion  of  possible  supply, 
final  or  marginal  cost.      R   is   the  actual   buj^er 


96  THE  ECONOMICS   OF  DISTRIBUTION. 

whose  limit-price  is  highest;  he  will  pay  more 
than  any  other  buyer,  because  he  wants  a  unit  of 
supply  most,  or  because  he  has  more  money  at 
his  disposal,  so  as  to  make  his  "effective  desire" 
the  greatest.  In  other  words,  R  is  the  person 
who  imputes  the  highest  utility,  and  M  is  the 
representative  of  final  or  marginal  utility.  The 
differential  advantages  obtained  by  A,  B,  C,  D,  E 
among  the  sellers,  and  N,  O,  P,  Q,  R  among  the 
buyers,  will  thus  be  found  to  correspond  to  real 
differences  of  cost  (expenses)  of  production  on 
the  one  hand  and  utility  on  the  other  hand.  If, 
without  making  any  other  change,  we  transfer  our 
illustration  from  a  horse-market  to  a  market  of 
some  manufactured  wares,  it  will  easily  appear  that 
the  larger  gain  which  D,  C,  B,  and  A  make  as 
compared  with  E  upon  each  sale  effected  signifies 
and  rests  upon  the  special  advantages  possessed 
by  each  in  economy  of  manufacture.  Similarly, 
it  will  be  recognised  that  the  special  gains  made 
by  O,  P,  Q,  R,  in  their  capacity  of  purchasers,  as 
compared  with  M,  is  based  upon  special  amounts 
of  utility  attributed  by  them  to  the  same  goods  for 
trade  or  for  consumption. 

On  each  side,  among  the  buyers  or  the  sellers, 
the  differential  gain  or  "  rent "  is  to  be  measured 
from  the  position  of  a  member  of  the  final  pair 
representing  marginal  cost  or  marginal  utility. 
In  our  diagram  the  dotted  line  which  connects  F 
with  M  enables  us  to  see  at  a  glance  the  relative 


LONG-PERIOD  PEICES  AND   VALUE.         97 

size  of  these  differential  gains,  which  include 
those  portions  of  A,  B,  C,  D,  on  the  sellers'  side, 
which  fall  below  the  price  line ;  and  those  portions 
of  N,  O,  P,  Q,  on  the  buyers'  side,  which  rise 
above  that  line. 

A  certain  awkwardness  in  the  setting  forth  of 
this  analysis  arises  from  the  fact  that  F  and  M, 
the  final  or  determinant  pair  representing  mar- 
ginal cost  and  utility  respectively,  do  not  figure 
in  the  actual  sales  effected,  but  are  excluded  mar- 
gins. This  is  due  to  the  fact  that  our  example 
has  placed  for  convenience  certain*  definite  inter- 
vals between  two  valuations  of  buj^ers  and  sellers 
respectively.  Under  conditions  of  perfect  compe- 
tition the  intervals  will  be  infinitely  small,  and 
E  and  N,  the  extremes  of  iictual  supply  and 
demand,  would  be  legitimately  taken  to  represent 
marginal  cost  and  marginal  utility.  But  for  pres- 
ent purposes  these  margins  must  be  understood  to 
lie  just  outside  the  actual  supply  and  demand. 

We  may  summarise  the  bearing  of  this  analysis 
upon  the  theory  of  Value  and  Price  in  the  fol- 
lowing words:  Granting  the  assumption  of  the 
mathematical  economist  that  the  supply  and  de- 
mand of  a  market  are  infinitely  divisible,  the 
marginal  or  final  pair,  whose  transaction  directly 
determines  price,  earn,  both  of  them,  an  infinitely 
small  gain.  In  such  a  case  either  marginal  cost 
or  marginal  utility  may  be  taken  with  equal  cor- 
rectness to  measure  or  determine  price  and  value. 


98  THE  ECONOMICS   OF  DISTRIBUTION. 

If  the  various  contributors  to  supply  and  demand 
are  likewise  supposed  to  enjoy  precisely  similar 
advantages  of  production  and  to  be  subject  to  pre- 
cisely equal  pressure  of  needs,  no  differential  gains 
would  emerge,  and  the  market-price  would  dis- 
tribute the  gain,  which  would  be,  however,  in- 
finitely small  on  each  transaction,  with  exact 
equality  among  all  who  took  part.  The  actual 
circumstances  of  a  real  market  are  found  to  be 
very  different  from  this.  Whether  we  take  a 
short  or  a  long  period,  a  "  market "  or  a  "normal  " 
price,  we  find  that  neither  marginal  cost  nor 
marginal  utility  exactly  determines  price  or 
value  as  an  independent  cause,  though  in  any 
given  market  one  or  the  other  will  furnish  a  true 
measure  of  price  or  value.  In  the  transaction 
of  the  marginal  pair  which  determines  price  and 
value  an  element  of  "forced  gain  "always  emerges, 
smaller  where  the  market  is  large  and  free,  larger 
where  it  is  small  and  restricted.  The  variation 
of  the  economic  resources  of  the  different  buyers 
and  sellers  increases  the  inequality  of  distribution 
effected  by  sales  at  a  common  price,  by  adding  to 
this  forced  gain  a  differential  gain.^ 

1  The  notion  that  cost  is  a  more  serviceable  measure  of 
value,  even  if  it  ranks  equally  with  utility  as  a  cause  of  value, 
based  upon  the  belief  that  different  costs  can  more  easily  be 
reduced  to  and  expressed  in  some  common  term,  such  as 
"  labour -power  "  or  "labour-time,"  has  no  warrant.  Labour- 
time,  ignoring  kinds  and  intensities  and  other  conditions  of  the 
giving  out  of  labour-power,  is  no  more  a  measure  of  "cost"  than 


FIBST  APPENDIX  TO   CHAPTER  III.  99 

FIEST  APPENDIX   TO   CHAPTER  III. 

The  Subjective  Basis  of  Value. 

In  order  to  mark  the  essentially  subjective  nature 
of  the  theory  of  Value,  it  is  desirable  to  distinguish 
more  definitely  subjective  cost  and  utility  from  ob- 
jective cost  and  utility. 

Subjective  cost  must  be  taken  to  consist  of  the  act- 
ual effort  of  workers  measured  in  terms  of  disagree- 
able feeling  and  regarded  as  a  quantity,  i.e.  disutility 
in  work,  as  estimated  by  the  individual  consciousness 
of  the  worker.  Objective  cost  must  be  taken  to  mean 
the  productive  energy  which  attaches  to  this  effort, 
referred  for  measurement  to  some  objective  standard, 
i.e.  hours,  foot-tons,  etc. 

Subjective  utility  will  represent  the  pleasurable 
feeling  got  out  of  consumption  by  the  consumer,  re- 
garded as  a  quantity,  i.e.  the  quantity  of  pleasure  got 
from  eating  a  loaf,  or  burning  coals  for  warmth.  Ob- 
jective utility  will  measure  the  services  of  consumable 
goods  by  some  objective  standard,  i.e.  the  power  of 

abstract  "satisfaction"  is  a  measure  of  utility;  and  the  fact 
that  tlie  former  is  more  usually,  and,  for  certain  purposes,  con- 
veniently, measured  by  the  clock  than  the  latter,  gives  it  no  prac- 
tical advantage  as  a  sound  and  accurate  measure  of  value.  It 
is  curious  to  find  so  keen  a  writer  as  Dietzel  resorting  to  this 
crudest  fallacy  of  the  Marxian  analysis,  in  his  criticisms  of  the 
marginal  utility  theory  {Jahrbncher  fur  Xational-Oekonomie, 
B.  XX,  SS.  587-8),  and  concluding  that,  "  Whether  I  reckon  by 
cost-value  or  use-value,  the  result  is  the  same.  But  I  reckon 
more  simply  and  more  accurately  by  cost-value  than  by  use- 
value." 


100       THE  ECONOMICS   OF  DISTRIBUTION. 

sustaining  life,  or  furnisliing  physical  power  contained 
in  a  bushel  of  wheat,  the  actual  heating-power  in  a 
hundred-weight  of  coal. 

The  distinction  is  of  supreme  importance  in  the  art 
of  economics.  For  while  the  subjective  cost  and  util- 
ity which  attach  to  the  production  and  consumption 
of  wealth  are  evidently  the  true  measure  of  economic 
prosperity  and  adversity,  as  interpreted  by  the  present 
conscious  estimates  alike  of  individuals,  classes,  or 
societies,  it  is  equally  evident  that  the  operations  of 
the  actual  industrial  world,  as  expressed  by  many  val- 
uations, have  direct  reference  only  to  objective  cost 
and  objective  utility. 

Now  it  will  easily  appear  that  a  given  quantity  of 
objective  cost  may  be  related  to  indefinitely  divergent 
quantities  of  subjective  cost,  according  as  it  is  distrib- 
uted. A  given  quantity  of  labour-power  will  imply  a 
quantity  of  painful  effort  which  varies  (1)  With  the 
nature  and  conditions  of  the  work,  e.g.  according  as  it 
is  monotonous,  taxing  continuously  the  same  muscles 
or  lierves,  or  varied,  according  as  it  implies  danger 
of  disease  or  accident  from  the  conditions  under  which 
it  is  carried  on.  (2)  With  the  mode  of  its  apportion- 
ment among  the  workers,  e.g.  according  as  it  falls 
upon  strong  men  or  upon  weaker  women  and  children, 
according  as  it  is  given  out  in  a  long  or  short  day's 
work,  etc. 

A  corresponding  analysis  of  utility  will  show  that 
a  given  quantity  of  objective  utility  will  vary  indefi- 
nitely when  reduced  to  terms  of  subjective  utility  ac- 
cording to  (1)  the  nature  and  conditions  of  consumption 
to  which  the  objective  utilities  lend  themselves,  i.e. 


FIRST  APPENDIX  TO  CHAPTER  III.       101 

the  capacities  and  methods  of  enjoyment  possessed  by 
the  actual  consumers  ;  (2)  according  to  their  distribu- 
tion among  the  consuming  public,  i.e.  food  will  vary  in 
subjective  utility  from  infinity  to  zero,  according  as  it 
passes  into  the  possession  of  a  starving  person  or  a 
fully-fed  one. 

In  this  analysis,  be  it  observed,  no  departure  is 
made  from  the  commonly  accepted  economic  standard. 
The  appeal  is  not  to  any  such  ethical  or  vital  standard 
of  values,  as  Ruskin  seeks  to  substitute  for  market 
valuations.  The  present  estimate  is  based  strictly 
upon  what  "  is,"  not  iipon  what  "  ought "  to  be ;  the 
existing  conscious  valuations  of  desirable  and  undesir- 
able, on  the  part  of  workers  and  consumers,  are  taken 
as  the  standard. 

Referred  to  our  theory  of  Value  or  Importance  the 
terms  will  take  the  following  setting :  — 

Subjective         Objective  Objective  Subjective 

Cost.  Cont.  Utility.  Utility. 

Measured       Measured  Measured        Measured 

in  units  ofv  in  hours,  v  Importance  /in  power  of  An  units  of 
undesira-     ^foot-tons,  ^        or  <^  sustaining    <{  desirabil- 

bility  of  ef-^  or  other   -^       value      ^vital  en-       ^ity  by  con- 
fort  measures  ergy,  or  fur-    sumers 
of  output                            nishing  me- 
chanical 
force,  i.e. 
nitrogenous 
units  or  de- 
grees of 
temperature 

Professor  Smart  ^  suggests  a  serviceable  illustration 
from  the  production  and  consumption  of  a  given  quan- 
tity of  coal. 

1  Value,  p.  6. 


102       THE  ECONOMICS   OF  DISTRIBUTION. 

Subjective  Objective  Objective  Subjective 

dost.  Cost.  Utility.  I'tility. 

Painful  ef-v     Hours'         ^    Supply   /TT_„t;„_    /Satisfaction 
fort  of  \  work  in        \     of      /  ^^^"°S- /  gained  from 

miners         /  raising  coal  /     coal     ^  ^  ^  the  heat 

The  efficacy  and  fruitfulness  of  this  distinction  of 
subjective  and  objective  value  may  be  illustrated  by 
showing  how  it  clearly  explains  one  difficulty  which 
besets  the  ordinary  commercial  view  of  value.  Take 
a  Supply  of  commodities  :  the  first  portion  that  is  sold 
goes  to  satisfy  the  strongest  desires  of  consumers,  the 
next  portion  a  somewhat  weaker  desire,  and  so  on 
until  the  last  portion  that  is  sold  satisfies  the  weakest 
desire,  or,  using  the  ordinary  language,  has  the  small- 
est utility  attached  to  it.  Yet  all  portions  have  the 
same  price  and  the  same  value.  Those  who  insist  on 
taking  utility  as  the  essence  of  value  find  it  difficult 
to  explain  how,  with  a  diminishing  utility  attached  to 
the  successive  portions  sold,  the  value  and  price  of  the 
part  which  serves  the  fullest  use  are  as  great  as  that 
which  supplies  a  necessary  of  life. 

But  our  tabulation,  which  makes  value  =  impor- 
tance, shows  that  the  importance  attaching  to  all  por- 
tions of  supply  that  are  sold  is  equal.  For  as  the 
subjective  utility  furnished  by  consumption  of  the 
later  units  of  supply  diminishes,  the  subjective  cost 
of  producing  these  has  increased.  The  first  unit  of 
consumption  which  satisfies  the  strongest-felt  need  is 
rightly  considered  as  taking  off  that  portion  of  supply 
which  would  be  produced  if  no  other  were  produced, 
because  it  can  be  produced  most  easily.  Each  later 
portion  taken  from  supply  satisfies  a  weaker  need, 
but  is  produced  at  a  greater  cost,  and  since  cost  plays 


FIIIST  APPENDIX  TO   CHAPTER  III.       103 

the  same  direct  part  in  assigning  importance  or  value 
to  an  article  as  does  utility,  there  is  no  diminution 
of  value  by  a  reduction  of  utility  accompanied  by  a 
corresponding  rise  of  cost.  The  last  portion  of  sup- 
ply with  the  least  subjective  utility  has  the  highest 
subjective  cost. 

This  has  been  illustrated  by  pointing  out  that  the 
last  bottle  of  wine  at  the  millionnaire's  feast,  which 
furnishes  the  smallest  satisfaction  to  the  drinkers,  is 
the  bottle,  the  products  of  which  represents  the  last 
hour's  labour  of  the  hardest-worked  producer,  i.e.  has 
the  highest  subjective  cost  attached  to  it. 

Thus  it  can  be  simply  shown  how  it  is  that  each 
separate  unit  of  supply,  though  it  has  a  different  cost 
and  a  different  utility  from  any  other  unit,  has  the 
same  value  or  importance. 

Professor  Scott,  of  the  University  of  Wisconsin,  in 
a  letter  which  discusses  the  relative  importance  of  the 
influence  of  ''human  costs"  and  "human  utilities"  on 
value,  makes  the  following  interesting  and  pertinent 
remarks  concerning  "the  density  and  elasticity  of  the 
medium  through  which  'human  costs'  produce  their 
effect  on  value."  —  "Under  modern  conditions  of  pro- 
duction there  is  a  long  road  between  human  sacrifices 
and  changes  in  the  supply  of  goods.  The  people  who 
furnish  these  sacrifices  are,  for  the  most  part,  labourers, 
and  not  infrequently  a  change  of  supply,  which  may 
mean  greater  sacrifice  for  them,  may  not  mean  greater 
costs  for  the  man  whose  acts  are  directly  responsible 
for  changes  in  supply.  Human  costs  may,  therefore, 
change  without  producing  any  change  in  supply  or 
value."     This  failure  of  human  costs  to  register  their 


104       THE  ECONOMICS   OF  DISTRIBUTION. 

changes  accurately  in  expenses  of  production,  and  so 
to  operate  through  supply  on  value,  is  of  practical  im- 
portance, and  when  in  a  later  chapter  I  discuss  the 
special  conditions  of  the  labour-market,  the  reasons 
for  this  failure  will  be  evident. 


SECOND  APPENDIX  TO   CHAPTER  III. 

Bohm-Bawerk' s  General  Theory  of  Value. 

The  elaborate  attempt  made  by  Bohm-Bawerk  in 
his  important  work,  "The  Positive  Theory  of  Capi- 
tal," to  derive  all  "  value  "  from  the  utility  of  final  or 
consumptive  goods,  and  to  refute  the  "  cost "  theory  of 
Value  by  showing  the  ultimate  dependence  of  costs 
upon  utility,  deserves  separate  consideration.  The 
keen,  and  sometimes  brilliant,  analysis  by  which  he 
has  traced  the  flow  of  utility  from  consumptive  goods 
through  the  veins  of  industry  in  all  the  productive 
processes,  and  has  thus  impressed  upon  his  readers  the 
organic  unity  of  the  entire  industrial  system,  has  in- 
duced many  to  accept  his  interpretation  of  causality 
in  value  as  a  sound  and  conclusive  result  of  close 
reasoning. 

Let  us,  however,  test  Bohm-Bawerk's  steps,  starting 
from  his  identification  of  "value"  with  economic 
"importance,"  adopting,  as  far  as  possible,  his  own 
statement  of  his  case. 

In  the  mere  identification  of  value  with  "impor- 
tance" there  is  nothing  to  indicate  whether  or  how 
far  the  "  importance "  of  a  good  is  derived  from,  and 
depends  upon,  the  costs  of  making  it  or  the  satisfaction 


SECOND  APPENDIX   TO   CHAPTER  III.       105 

of  oons\iming  it.  But  no  sooner  has  Bohm-Bawerk 
adopted  "importance"  as  a  synonym  of  value  than  he 
proceeds  to  "  bias  "  it  toward  utility.  When  we  read 
(p.  138)  that,  "  If  the  value  of  a  good  is  its  importance 
to  human  well-being,  and  if  this  '  importance '  means 
that  some  portion  of  our  well-being  is  dependent  on 
our  having  the  good,  it  is  clear  that  the  amount  of  the 
goods  value  must  be  determined  by  the  amount  of 
well-being  which  depends  on  it."  These  words  make 
it  evident  that  "importance"  is  already  conceived  as 
a  quality  of  goods  which  comes  to  the  possessor,  and 
that  "  well-being  "  is  regarded  purely  as  an  effluence 
of  consumption.  So  when  the  question  is  once  more 
fairly  put  on  the  following  page  (139),  "  What  is  the 
gain  to  our  well-being  that  in  any  given  circumstances 
depends  upon  a  good,"  the  answer  already  imported 
into  the  question  is  "  Utility."  This,  indeed,  he  openly 
avows,  declaring  that  "  the  measure  of  the  iitUity 
which  depends  on  a  good  is,  actually  and  everywhere, 
the  measure  of  value  for  that  good."  We  have  then 
at  once  and  plainly  identified  "utility  "  with  "  impor- 
tance." 

He  next  proceeds  (p.  140)  to  identify  this  "well- 
being  "  or  "  utility  "  with  "  the  satisfaction  of  a  want," 
and  to  insist  that  the  amount  of  this  "well-being" 
derived  from  a  "  good  "  is  found  in  the  answer  to  two 
questions,  —  "  First,  ichich,  among  two  or  more  wants, 
depends  on  it  ?  and,  second,  what  is  the  urgency  of 
the  dependent  Avant  or  of  its  satisfaction  ?  "  (p.  140). 
It  might  be  thought  that  his  own  use  of  the  word 
"  urgency "  (which,  though  called  in  to  explain,  only 
repeats  the  notion  originally   conveyed  by  "inipor- 


106       THE  ECONOMICS   OF  DISTRIBUTION. 

tance")  miglit  have  bade  Bohni-Bawerk  pause  and 
reflect  whether  the  "  urgency  "  of  obtaining  a  particu- 
lar good  might  not  depend  upon  the  cost  of  obtaining 
an  alternative  good  as  much  as  upon  the  intensity  of 
the  desire  of  the  consumer.  But  by  this  time  the 
'' importance "  of  a  good  has  exclusive  reference  in 
Bohm-Bawerk's  eyes  to  the  satisfaction  in  consump- 
tion ;  and  he  proceeds  to  a  careful  and  highly  service- 
able analysis  of  the  kinds  of  wants,  on  the  one  hand, 
and  the  degrees  of  wants  on  the  other.  Then  upon 
this  basis  he  develops  and  illustrates  the  theory  of 
Marginal  Utility  in  relation  to  different  kinds  and 
quantities  of  consumables. 

Then,  strangely  enough,  after  utility  has  already 
been  identified  with  value  and  "  importance,"  and  mar- 
ginal utility  has  already  been  taken  as  criterion,  the 
whole  issue  is  once  more  thrown  into  the  melting-pot 
by  starting  the  question,  "  What  determines  marginal 
utility  ? "  It  now  appears  (for  a  little  while)  that 
the  "  importance  "  (or  value)  of  goods  is  not,  as  was 
just  affirmed,  identical  with  their  utility  in  consump- 
tion. On  the  contrary,  Chapter  VI  opens  with  a  sane 
statement  of  the  Law  of  Value  which,  though  loosely 
worded,  is  essentially  correct. 

"  Usefulness  and  scarcity  are  the  ultimate  deter- 
minants of  the  value  of  goods."  Now,  not  only  is 
scarcity  thus  fetched  up  from  the  supply  side  of  the 
equation  as  a  determinant  of  value  separate  from 
utility,  but  it  is  made  the  determinant  of  "  marginal 
utility  "  itself,<  for  "  it  is  tlie  scarcity  that  decides  to 
what  point  the  marginal  utility  actually  does  rise  in 
the  concrete  case"  (p.  160). 


SECOND  APPENDIX  TO   CHAPTER  III.      107 

Now,  since  "  concrete  cases  "  are  precisely  those  to 
which  the  theory  of  vahie  must  apply,  Bohm-Bawerk 
is  surely  affected  by  a  suicidal  mania  in  placing 
"  marginal  utility  "  at  the  mercy  of  "  scarcity."  For 
"  scarcity  "  depends,  so  far,  at  any  rate,  as  most  goods 
are  concerned,  upon  marginal  costs  of  production,  and 
it  therefore  appears  that  marginal  costs  will  in  these 
cases  determine  final  utility.  Here  we  perceive  that 
Bohm-Bawerk  has  made  an  abandonment  of  his  posi- 
tion very  similar  to  that  which  Jevons,  by  the  show- 
ing of  Marshall,  had  made  before  him.  Nor  is  this  a 
momentary  lapsus  calami,  for  the  writer  proceeds  to 
develop  a  theory  which,  though  it  no  longer  maintains 
"scarcity"  in  the  dominant  position  just  accorded  it, 
equally  repudiates  the  dominance  of  marginal  utility 
for  the  time  being.  We  are  now  told  that  "  the  height 
of  marginal  utility  is  determined  by  the  relations  of 
wants  and  provisions  "  (p.  160).^ 

But  though  Bohm-Bawerk  goes  so  far  in  a  footnote 
as  to  make  a  perfectly  straight  declaration  of  a  sound 
theory  of  Value  in  affirming  that  "the  relation  of 
wants  and  provisions  is  the  ultimate  universal  deter- 

1  "Classical  economists,"  as  Dietzel  remarks,  "have  some 
ground  for  dissatisfaction  at  having  served  up  to  them,  at  the 
end  of  a  long  process  of  investigation,  a  Law  of  '  Marginal 
Utility'  which  turns  out  after  all  to  be  the  familiar  'Law  of 
Supply  and  Demand.'  "  "The  value  of  a  good  depends  upon 
the  amount  of  its  '  marginal  utility ' :  the  latter  upon  the  re- 
lation of  needs  and  provision,"  says  Bohm  ;  "the  others,  with 
their  formula  that  price  depends  upon  the  relation  of  demand 
(want)  and  supply  (provision),  come  to  the  same  result." 
{Jahrhucher  fur  National- Okonomie,  Neue  Folge,  Bd.  XX, 
S.  670.) 


108       THE  ECONOMICS   OF  DISTRIBUTION. 

minant  of  the  value  of  goods "  (p.  160),  he  gives  no 
analysis  of  the  ideas  of  "  scarcity  "  and  "  provision " 
to  which  he  has  given  such  a  commanding  place,  and 
traces  no  connection  between  them  and  "  costs."  On 
the  contrary,  in  the  following  chapters,  VII,  VIII, 
and  IX,  he  returns  to  his  application  of  the  theory  of 
Determination  of  Value  by  Marginal  Utility,  just  as  if 
he  had  never  interrupted  or  abandoned  it.  It  is  not 
until  Chapter  X  that  he  confronts  the  real  issue  of 
"costs."  It  soon  becomes  evident  that  he  is  destined 
to  adopt  the  same  ''  question-begging  "  method  as  that 
by  which  "  importance  "  was  originally  identified  with 
utility.  The  "value"  of  productive  goods  is  what 
we  have  really  to  investigate,  for  the  "  costs  "  which, 
according  to  cost-theorists,  dominate  value,  are  ex- 
pressed and  contained  in  productive  goods.  Now, 
instead  of  proving  that  the  "  value "  of  productive 
goods,  like  that  of  consumptive  goods,  is  derived  from 
utility,  Bohm-Bawerk  simply  asserts  it  as  "self-evi- 
dent." "On  the  lines  of  our  conception  of  value  it 
must  be  self-evident  that  a  productive  good,  like  any 
other  good,  can  only  obtain  value  for  us  through  our 
recognition  that  on  its  possession  or  non-possession 
depends  our  gain  or  loss  of  some  one  utility,  of  some 
one  satisfaction  of  want.  And  it  is  equally  self- 
evident  that  its  value  will  be  high  when  the  dependent 
satisfaction  is  important,  and  low  when  it  is  unimpor- 
tant. The  only  difference  is,  that,  in  the  case  of  goods 
for  immediate  consumption,  the  good  and  the  satisfac- 
tion stand  beside  each  other  in  a  direct  causal  relation, 
while,  in  the  case  of  productive  goods,  there  is  inter- 
posed   between    them    and    the    satisfaction    finally 


SECOND  APPENDIX   TO   CHAPTER  III.       109 

dependent  on  them  a  more  or  less  lengthy  series 
of  intermediate  members,  their  successive  products" 
(p.  181). 

We  have,  then,  elaborate  illustrations  of  the  way  in 
which  the  utility  of  consumptive  goods  is  reflected 
back  upon  the  productive  goods  and  constitutes  their 
value.  "The  value  of  each  group  has  its  immediate 
measure  in  the  value  of  its  product,  the  succeeding 
group  "  (p.  182).  So  "  from  stage  to  stage  the  name  of 
the  determining  element  changes,  but  under  the  differ- 
ent names  it  is  always  the  same  thing  that  acts  — 
the  marginal  utility  of  the  final  product"  (p.  183). 
We  have  now  a  perfectly  smooth  and  intelligible 
theory  in  which  all  claims  of  "costs"  to  determine 
value  disappears  (though  later  on  it  will  be  revived  for 
"  a  particular  case  "  of  value).  In  Bohm-Bawerk's  own 
words  we  may  piece  together  and  thus  condense  the 
argument.  "  Costs  are  nothing  else  than  the  complex 
of  those  productive  goods  which  have  value  —  the  lar 
bour,  concrete  capital,  uses  of  wealth,  and  so  on,  which 
must  be  expended  in  the  making  of  a  product "  (p.  183). 
"  The  amount  of  this,  their  (referring  to  '  means  of  pro- 
duction,' and  so  to  costs)  common  value,  is  regulated 
for  all,  in  the  last  resort,  by  the  amount  of  the  mar- 
ginal utility  of  their  finished  product  "  (p.  182).  "  To 
put  it  generally:  the  value  of  the  productive  imit  ad- 
justs itself  to  the  marginal  utility  and  value  of  that 
product  which  possesses  the  least  marginal  utility 
among  all  the  products  for  whose  production  the  unit 
might,  economically,  have  been  employed  "  (p.  186). 

Here  is  a  perfectly  consistent  statement  of  the  doc- 
trine of  marginal  utility  as  the  final  determinant  of 


110       THE  ECONOMICS  OF  DISTRIBUTION 

value  of  all  productive  goods.  But  what  has  become 
of  "  scarcity "  and  the  dominant  place  once  assigned 
to  it,  and  where  has  the  interrelation  of  "  wants  and 
provisions  "  disappeared  ? 

To  get  rid  of  "costs"  by  merging  them  in  "pro- 
ductive goods,"  ^  and  then  to  declare  that  it  is  "  self- 
evident"  that  the  value  of  productive  goods  depends 
upon  the  marginal  utility  of  the  consumptive  goods 
they  are  designed  to  make,  is  one  of  the  most  curiously 
bold  petitiones  principii  which  I  have  met  in  the  annals 
of  illogic.  The  judiciously  minded  reader  will,  at 
any  rate,  insist  upon  recalling  Bohm-Bawerk  to  the 
"scarcity"  and  the  "provision"  which  he  has  ad- 
mitted to  be  determinants  of  that  marginal  utility  of 
consumptive  goods  which  he  now  seeks  to  make  the 
be-all  and  end-all  of  economic  activities. 

If  his  argument  in  the  chapter  entitled  "  What  De- 
termines Marginal  Utility "  is  intended  to  stand,  we 
must  insist  on  taking  up  the  assertion  there  made  that 
"it  is  the  scarcity  that  decides  to  what  point  the 
marginal  utility  actually  does  rise  in  the  concrete 
case,"  and  the  allied,  though  inconsistent,  admission 
that  "  the  height  of  marginal  utility  is  determined  by 
the  relations  of  wants  and  provisions,"  and  we  must 
press  for  an  examination  of  the  bearing  of  "costs" 
upon  scarcity  and  provision.     If  scarcity  is  a  direct 

1  Dietzel  pertinently  remarks  that  "had  the  marginal-value 

theorists  given  their  consideration  to  the  '  power  of  production,' 
instead  of  to  that  of  the  possession  of  '  a  supply,'  they  could  not 
have  so  falsified  the  necessary  relation  between  the  value  of  the 
product  and  the  value  of  productive  or  '  cost'  goods."  {Jahr- 
biicher  fiir  National- Oekonomie,  N.  F.  Bd.  XX,  S.  580.) 


SECOND  APPENDIX   TO   CHAPTER  III.       Ill 

determinant  of  marginal  utility,  and  so  of  vahie  in 
consumptive  goods,  it  must  likewise  be  a  determinant 
of  the  value  of  productive  goods,  not  merely  the  scar- 
city of  the  consumptive  goods  reflected  back,  but  the 
particular  scarcity  of  each  supply  of  productive  goods. 
For  it  can  hardly  be  suggested  that  scarcity  of  fire- 
irons  affects  the  value  of  iron  ore,  but  that  scarcity  of 
iron  ore  itself  does  not  affect  its  value.  If  the  rela- 
tion of  wants  and  provisions,  or  in  current  economic 
language,  demand  and  supply,  govern  marginal  util- 
ity and  value  in  consumptive  goods,  as  Bohm-Bawerk 
declares  them  to  do,  surely  it  is  unreasonable  to  say 
that  the  relation  of  these  same  forces  does  not  govern 
the  value  of  productive  goods.  It  would  be  an  idle 
inconsistency  to  affirm  that  the  value  of  consumptive 
goods  is  determined,  not  by  marginal  utility,  but  by 
the  relations  of  "  wants  and  provisions,"  but  that  the 
value  of  all  intermediate  goods  is  determined  by  the 
marginal  utility  of  consumptive  goods.  This  position 
Bohm-Bawerk  does  not,  indeed,  directly  assume,  but  by 
words  from  his  own  pen  he  can  be  driven  into  it. 

The  entire  trouble  arises  from  his  refusal  to  analyse 
"  scarcity  "  when  he  has  declared  that  it  determines 
"marginal  utility"  in  "the  concrete  case."  Had  he 
done  so,  he  could  hardly  have  failed  to  admit  that 
"costs"  are  the  direct  determinants  of  "scarcity"  in 
most  classes  of  goods.  In  the  first  pages  of  Chapter 
X  a  partial  restoration  of  "costs"  as  a  "regulator" 
of  value  takes  place.  But  even  here,  where  the  law  of 
costs  is  admitted,  "costs  are  not  the  final,  but  only 
the  intermediate,  cause  of  value.  In  the  last  resort 
they  do  not  give  it  to  their  products,  but  receive  it 


112       THE  ECONOMICS   OF  DISTRIBUTION. 

from  them  "  (p.  189).  The  example  adduced  to  make 
this  perfectly  clear  is  perhaps  the  most  convincing 
evidence  of  the  petitio  principii,  with  which  I  charge 
Bohm-Bawerk  in  his  initial  dogmatic  identification 
of  ''importance"  with  ''utility."  "That  Tokay  is 
not  valuable  because  there  are  Tokay  vineyards,  but 
that  the  Tokay  vineyards  are  valuable  because  Tokay 
has  a  high  value,  no  one  will  be  inclined  to  deny, 
any  more  than  that  the  value  of  a  quicksilver  mine 
depends  on  the  value  of  quicksilver,  the  wheat  field 
on  the  value  of  wheat,  the  brick  kiln  on  that  of  bricks, 
and  not  the  reverse"  (p.  189).  On  the  contrary,  this 
is  precisely  what  the  major  number  of  thoughtful 
economists  have  always  denied ;  while  admitting  that 
the  utility  of  Tokay  vineyards  depends  upon  the 
utility  of  Tokay,  they  refuse  to  make  the  assumption 
that  value  is  identical  with  utility,  and  are  inclined  to 
insist  that  the  "  high  value  "  of  Tokay  is  itself,  in 
part,  determined  by  the  limited  quantity  of  Tokay 
vineyards.  This,  Bohm-Bawerk  has  admitted  when 
(p.  160)  he  makes  marginal  utility  depend  on  "  scar- 
city." What  natural  scarcity  does  in  the  case  of 
Tokay  vineyards,  "costs"  do  in  the  case  of  freely 
produced  goods.  Bohm-Bawerk  is  right  in  declaring 
"costs  are  not  the  final,  but  only  the  intermediate, 
cause  of  value."  But  the  economic  problems  of  value 
are  concerned  with  intermediate  or  efficient,  and  not 
with  final,  causes.  We  may  yield  to  Bohm-Bawerk 
the  final  causality  of  utility  all  along  the  line,  but  in- 
sist that  the  relations  between  cost  (or  scarcity)  and 
utility  are  what  economists  should  regard  as  "causes" 
of  value. 


CHAPTER   IV. 

THE   LAW   OF   RENT  AS  THE  BASIS  OP   COORDINA- 
TION  OF   THE   FACTORS   OF    PRODUCTION. 

Part  I. 

§  1.  In  discovering  the  method  by  which  a  price 
of  goods  is  determined,  we  have  practically  learnt 
how  a  ratio  of  exchange  is  established  between 
one  class  of  goods  and  any  other  class.  For  the 
sale  of  goods  for  money  is  admittedly  not  more 
than  half  a  transaction;  when  the  money  that  is 
received  has  been  expended  in  an  act  of  purchase, 
the  transaction  is  complete ;  goods  have  been  ex- 
changed for  goods. 

But  in  order  to  understand  more  fully  the 
nature  of  this  bargain,  we  must  regard  any  two 
commodities  which  have  been  exchanged  as  com- 
plexes of  the  various  quantities  of  factors  of  pro- 
duction that  have  entered  into  them  in  the  various 
productive  processes. 

A  bargain  for  the  sale  or  the  exchange  of  finished 
commodities  will  depend,  so  far  as  supply-forces 
are  concerned,  upon  the  conditions  of  a  number 
of  preceding,  underlying  bargains  for  the  use  of 

113 


114        THE  ECONOMICS   OF  DISTRIBUTION. 

different  kinds  and  quantities  of  land,  capital,  and 
labour  power.  How  far  does  our  analysis  of 
market-price  (and  value)  of  commodities  apply 
also  to  the  transactions  for  purchase  of  the  use  of 
these  factors? 

The  market-price  of  commodities  contained, 
over  and  above  the  measure  of  marginal  cost  or 
marginal  utility,  a  residuum  of  "forced  gain,"  and 
also  allowed  a  series  of  differential  gains  to  accrue 
to  the  stronger  buyers  and  sellers,  measured  from 
the  position  of  the  marginal  buyer  and  seller. 

§  2.  Do  the  same  conditions  hold  for  the  pur- 
chase of  the  use  of  the  factors  of  production?  If 
we  regard  the  hiring  of  factors  of  production  as 
equivalent  to  the  sale  of  their  use,  we  are  con- 
fronted with  the  investigation  of  the  market  for 
the  sale  of  the  use  of  various  supplies  of  land, 
labour,  and  capital. 

Now  these  markets  differ  in  one  radical  respect 
from  a  market  for  commodities,  in  the  mode  of 
measuring  the  supply.  In  our  setting  of  the 
horse-market,  and  any  other  market  for  goods,  a 
supply  was  reckoned  for  purposes  of  bargain  as 
consisting  of  a  number  of  units  of  equal  quantity 
and  quality.  Where  the  wheat  or  wool  in  a 
market  consists  of  different  qualities  or  kinds,  it 
will,  in  theory  and  usually  in  practice,  rank  as  a 
number  of  separate  supplies  subject  to  separate 
bargaining.  Our  differential  gains  in  such  a 
market  measured  the  different  valuations  set  by 


THE  LAW  OF  RENT.  115 

buyers  or  sellers  upon  goods  which  were  held  to 
be  identical  in  size  and  quality.  Now  in  a  market 
for  the  sale  of  the  use  of  labour  and  land  no  for- 
mal reduction  to  equal  sized  units  takes  place. 
Though  the  real  object  of  sale  is  a  quantity  of 
productive  power  vested  in  land  or  labourers, 
what  is  nominally  bought  and  sold  is  the  use  of 
so  man}'-  acres,  or  so  many  labourers,  containing 
each  of  them  an  indefinitely  larger  or  smaller 
quantity  of  productive  power.  But  while  the 
bargainers  express  themselves  in  terms  of  acres 
and  labourers,  the  real  object  of  their  bargain  is 
the  use  of  land-power  and  labour-power,  and  they 
are  continually  engaged  in  reducing  acres  and 
labourers  to  units  of  productive  power  when  they 
buy  and  sell.  The  maintenance  of  this  awkward 
mode  of  measuring  land  and  labour,  and  the 
necessity  of  finding  some  standard  of  reference  in 
order  to  ascertain  the  quantity  of  productive  power 
contained  in  an  acre  or  a  labourer,  has  given  rise 
to  a  grading  of  these  factors  of  production  which 
has  played  a  large  part  in  economic  theory.  In 
particular,  it  has  given  rise  to  the  habit  of  taking 
the  least  productive  land  and  labour  as  a  standard 
of  reference,  and  reckoning  the  productivity  of 
better  land  and  labour  by  comparison  with  this. 
Thus  the  better  land  and  labour  in  a  supply  is 
held  to  obtain  a  differential  gain  or  rent  which 
measures  the  excess  of  its  productive  power  over 
the  worst  land  or  labour.     If  an  acre  of  the  worst 


116       THE  ECONOMICS   OF  DISTRIBUTION. 

land  in  use  contains  4  units  of  land-use,  then  an 
acre  of  better  land  containing  8  units  has  a  differ- 
ential rent  of  4  units  imputed  to  it.  Now  it  is 
important  to  observe  that  these  differential  rents 
are  in  no  sense  equivalent  to  the  differential  gains 
which  arose  in  a  market  of  goods.  The  latter 
represent  the  different  valuations  put  by  different 
buyers  and  sellers  upon  similar  objective  quanti- 
ties, the  former  represent  valuations  of  different 
objective  quantities.  In  order  to  place  the  sale 
of  factors  of  production  upon  the  same  level  with 
markets  for  the  sale  of  goods,  it  will  be  necessary 
to  eliminate  these  objective  differences  which  rest 
upon  customary  modes  of  measuring  the  reposi- 
tories of  productive  power. 

But  since  economic  theory  has  felt  obliged  to 
adopt  for  many  purposes  the  conventional  modes 
of  measuring  productive  power,  and  has  derived 
thence  certain  laws  which  play  an  important  part 
in  the  theory  of  distribution,  it  is  necessary  to 
accept  provisionally  the  current  custom  of  measur- 
ing land  by  its  acreage  per  annum,  labour  by  the 
labourer  per  hour  or  week,  and  capital  by  its 
money  value,  in  .£100,  until  we  have  discovered 
a  method  of  common  measurement  of  the  factors 
which  any  satisfactory  theory  of  distribution  re- 
quires. 

The  general  tendency  of  economic  science,  es- 
pecially in  England,  has  been  to  assimilate  the 
theory  of  tlio  sale  of  capital-use  and  labour-power 


THE  LAW  OF  RENT.  117 

to  that  of  the  sale  of  goods,  but  to  mark  off  the 
sale  of  land-use  as  subject  to  quite  other  economic 
laws. 

I  propose  to  bring  the  sale  of  the  factors  of  pro- 
duction under  the  general  laws  of  value  and  of 
price  as  disclosed  by  the  investigation  of  bargain- 
ing for  commodities. 

For  this  purpose  it  is  necessary  (1)  to  coordinate 
the  three  factors  with  respect  to  the  conditions 
which  regulate  their  price ;  (2)  to  show  that  their 
sales  are  in  essence  identical,  as  economic  pro- 
cesses, with  the  sale  of  commodities. 

It  is  most  convenient  to  approach  the  first  of 
these  tasks  by  examining  the  validity  of  the  claim 
to  assign  a  separate  law  to  the  determination  of 
the  rent  of  land. 

The  separatist  doctrine  may  be  thus  summarised. 
Ricardo's  fundamental  assumption,  upon  which  it 
still  rests,  is  that  the  use  of  land  is  the  use  of 
certain  "  inherent  and  indestructible  properties  of 
the  soil,"  certain  fixed  supplies  of  laud  of  given 
fertility  and  position;  that  the  efforts  of  man 
caimot  increase  or  diminish  these  supplies.  So, 
whereas  the  price  of  the  use  of  capital  and  of 
labour  may  be  determined  by  processes  of  compe- 
tition and  higgling  based  upon  the  will  of  indi- 
vidual bargainers  to  increase  or  reduce  the  effective 
supply,  the  price  of  land-use  will  be  determined 
directly  by  circumstances  not  relating  to  land  but 
to  the  efficiency  of  capital  and  labour  in  those  in- 


118       THE  ECONOMICS   OF  DISTRIBUTION. 

dustries  into  which  land-use  enters.  That  is  to 
say,  rent  is  a  surplus,  land  taking  in  payment 
for  its  use  whatever  residue  is  left  after  human 
efforts  and  sacrifices  are  remunerated  at  a  com- 
petitive price. 

§  3.  Now,  since  the  determination  of  price  is 
our  objective,  it  will  be  most  profitable  to  test  the 
validity  of  this  separate  treatment  of  land  by 
examining  the  arguments  which  are  adduced  to 
support  the  doctrine  that  rent  of  land  forms  no 
element  in  prices,  "does  not  enter  into  price," 
and  does  not  help  to  determine  prices. 

Two  lines  of  argument  have  been  used  to  sup- 
port this  conclusion:  the  first  has  reference  to 
extensive  cultivation  with  a  margin  represented 
by  the  worst  pieces  of  land  in  use ;  the  second  to 
intensive  cultivation  with  a  margin  represented 
by  the  worst  productive  power  in  use,  contained 
in  a  particular  piece  of  land. 

These  two  arguments  are  often  adduced  as  con- 
tributory to  the  same  result  and  as  consistent  with 
one  another.  This,  I  propose  to  show,  is  not  the 
case. 

The  first  argument  is  that  with  which  we  are 
familiarised  by  Ricardo's  presentation  in  Chapter 
II  of  his  "Political  Economy."  We  are  to 
suppose  different  quantities  of  land  taken  suc- 
cessively into  cultivation  to  contribute  to  a  single 
supply:  the  "marginal"  land  in  use  at  any  time 
will  pay  no  rent ;  the  produce  raised  on  this  mar- 


THE  LAW  OF  RENT.  119 

ginal  land  with  the  hirgest  expenditure  of  labour 
and  capital  per  unit  of  produce  will  be  the  "  regu- 
lator "  of  the  price  of  the  whole  supply.  Since  no 
portion  of  the  value  of  the  produce  of  this  marginal 
land  is  taken  for  rent,  "rent  is  not  a  component 
part  of  the  price  of  commodities."  Ricardo  leaves 
it  to  be  inferred  that  since  the  worst  quantities  of 
labour  and  capital  engaged  in  production  pay  some 
wage  and  interest  to  their  owners,  wage  and  in- 
terest must  always  be  component  parts  of  the  price 
of  commodities. 

Now  this  reasoning,  so  far  as  it  relates  to  dif- 
ferential rents,  measuring  the  superiority  of  par- 
ticular lands  over  the  margin,  is,  of  course, 
irrefutable.  But  its  assumption  that  a  margin  of 
cultivation  is  composed  necessarily  of  no-rent 
land,  has  been  exposed  by  Adam  Smith  in  antici- 
pation and  by  numerous  writers  since  Ricardo. 
It  is  quite  unnecessary  to  have  recourse  to  the 
historical  arguments  which  Carey  and  others  have 
used  to  show  that  the  extension  of  the  margin  of 
cultivation  is  not  necessaril}^,  or  in  point  of  fact, 
from  better  land  to  worse.  These  arguments  are 
faulty  in  that  they  ignore  the  part  Avhich  position 
for  market  takes  in  determining  the  goodness  or 
badness  of  land. 

The  assumption  that  the  extensive  margin  is 
necessarily  a  no-rent  margin  arises  from  a  falla- 
cious simplicit}'  in  the  abstract  setting  given  by 
Ricardo  to  his  problem.     If  all  land  is  considered 


120       THE  ECONOMICS   OF  DISTRIBUTION. 

as  contributing  to  a  single  suppl}^  e.g.  wheat,  and 
if  this  supply  contains  more  land  than  is  required, 
some  of  which  is  slightly  inferior  to  the  worst 
land  in  use,  the  margin  will  be  no-rent  land. 

But  neither  of  these  assumptions  is  absolutely 
warrantable. 

Suppose  that  an  increase  in  the  population  and 
the  demand  for  wheat  brings  into  cultivation  all 
the  land  available,  the  worst  land  in  use  may  or 
must  pay  an  actual  rent.  This  will  not  be  a 
differential  rent,  but  a  forced  or  scarcity  rent 
limited  in  its  rise  only  by  the  pressure  of  the  need 
for  land,  and  representing  the  power  of  the  stronger 
bargainer  in  the  final  pair  that  determines  the 
market-price.  1  Such  forced  rent  would  evidently 
be  reckoned  as  an  expense  incidental  to  all  por- 
tions of  the  wheat  supply,  and  would  enter  into 
the  prices.  But  this  may  be  held  to  lie  outside 
of  practical  economics  for  a  countr}-  in  open  com- 
mercial relations  with  the  world  supply  of  land. 

What  really  invalidates  the  Ricardian  treatment 
is  the  fact  that  most  land  in  use  has  several  al- 
ternative uses  or  can  contribute  toward  several 
different  supplies. 

Though   the  worst  grazing   land   may  pay  no 

1  The  adjective  "  monopoly"  has  been  often  applied  to  such 
scarcity  ront  by  economists  ;  but,  though  bearing  some  analogy 
to  a  monopoly  or  "  one-man  market"  by  reason  of  the  dicta- 
torial power  hfld  by  the  marginal  owners,  this  marginal  rent 
is  best  described  as  a  scarcity  rent  or  forced  gain. 


THE  LAW  OF  RENT.  121 

rent,  the  worst  wheat  land  might  be  better  for 
grazing  than  the  worst  grazing  land,  in  which 
case  it  can  only  be  obtained  for  growing  wheat  by 
paying  a  little  more  than  its  differential  rent  for 
grazing  purposes;  this  rent  for  the  worst  wheat 
land  will  be  a  positive  rent,  and  will  enter  into 
wheat  prices ;  again,  the  worst  market-garden  land 
competing  for  a  given  market  may  be  tolerably 
good  wheat  land,  and,  if  so,  the  rent  which  it  could 
get  for  wheat  forms  a  marginal  rent  for  market- 
garden  land.  So  as  we  ascend  to  the  higher  and 
more  special  uses  of  land,  we  find  that  the  differ- 
ential rents  must  be  measured,  not  from  a  no-rent 
margin,  but  from  a  minimum  specific  rent  of  a 
higher  and  higher  order,  until  we  get  to  city 
ground,  which  is  measured  from  a  minimum  which 
must  exceed  the  rent  which  that  land  could  obtain 
for  the  best  agricultural  use  to  which  it  could  be 
put. 

The  accompanying  figure  will  serve  for  illus- 
tration. Suppose  the  city  A  to  lie  in  the  middle 
of  a  fertile  plain  surrounded  by  belts  of  land  de- 
voted to  different  uses.  The  outermost  belt,  E, 
is  rough  pasture,  improving  in  quality  and  posi- 
tion as  it  approaches  D,  so  that  whereas  the 
pasturage  at  the  outer  belt  of  E  pays  no  rent,  a 
gradually  rising  differential  rent  emerges  as  we 
approach  the  circle  D.  Similarly,  let  us  suppose 
the  belt  of  land  between  D  and  C  to  be  engaged 
in  growing  cereals,  the  worst  cereal  land  being  at 


122       THE  ECONOMICS   OF  BISTRIBUTION. 

D,  and  the  land  as  we  approacli  C  gradually  im- 
proving for  cereal  use.  If  the  worst  cereal  land 
at  D  would  be  of  equal  value  for  grazing  to  the 
grazing  land  midway  between  D  and  E,  it  will  be 
rented  for  cereal  use  at  a  rent  which  is  equivalent 
to  or  slightly  higher  than  the  differential  grazing 
rent  paid  by  the  land  midway  between  D  and  E. 
Thus  the  marginal  land  for  cereals  will  be  found 
paying  a  positive  rent,  and  the  differential  rents 


for  cereals  will  be  superimposed  upon  that  mar- 
ginal rent.  Again,  as  we  come  nearer  to  the  city, 
crossing  the  circle  C,  we  come  to  a  belt  of  laud 
utilised  for  market  gardens,  improving  in  quality 
and  position  as  we  near  the  circumference  B.  If 
the  worst  of  this  market-garden  land  in  C  is  capa- 
ble of  being  cereal  land  of  middling  quality,  the 
marginal  market-garden  land  will  pay  a  rent 
equivalent  to  the  marginal  cereal  rent  and  the 
differential  cereal  rent  for  middling  quality  of 


THE  LAW  OF  RENT.  128 

cereal  land.  In  the  same  way  it  will  appear  that 
the  worst  land  of  the  next  belt,  B,  devoted  to 
suburban  uses,  will  pay  a  still  higher  marginal 
rent,  based  upon  the  fact  that  the  worst  suburban 
land  at  B  may  be  capable  of  drawing  a  high  dif- 
ferential rent  for  market-garden  purposes.  When 
we  finally  reach  A,  the  city  itself,  the  worst  ground 
may  draw  a  ground  rent  higher  than  that  drawn 
by  the  margin  of  suburban  land.^ 

For  the  sake  of  simplicity  I  have  assumed  that 
the  marginal  rent  is  directly  and  exactly  deter- 
mined by  the  alternative  use  of  the  worst  land  in 
cultivation  for  each  use.  But  this,  of  course,  is 
not  necessarily  the  case.  It  is  not  necessary  that 
the  worst  land  should  have  an  alternative  use ;  it 
may  be  some  better  land,  enjoying  a  differential 
as  well  as  a  marginal  rent,  which  occupies  that 

1  This  argiiment  which  makes  "marginal  rents"  hinge  upon 
"  alternative  iises''''  of  land  may  appear  to  lean  unduly  toward 
the  doctrine  that  "marginal  utility"  determines  values.  But 
though  the  marginal  utility  theoiy  can  neatly  illustrate  the 
variation  of  values  connected  with  different  uses,  natural  varia- 
tions in  their  bearing  upon  scarcity  of  supply  cat  afford  a 
similar  "illustration"  from  the  other  side.  The  existence  of 
"alternative  uses"  with  different  values  may  be  explained 
either  by  the  different  chemical  and  other  qualities  of  the  soil 
(the  intensity  of  various  wants  being  given)  or  by  the  growth 
and  intensity  of  different  human  wants  (the  differences  in  quali- 
ties of  soil  being  assumed) .  The  true  explanation  makes  the 
value  of  "alternative  uses"  directly  dependent  on  the  relation 
between  natural  qualities  of  soil  and  human  wants.  Here,  as 
elsewhere,  "marginal  utility"  may  be  regarded  as  the  final 
cause  of  value,  but  not  as  the  sole  efficient  cause. 


124       THE  ECONOMICS   OF  DISTRIBUTION. 

position.  The  worst  wheat  land  might  obtain  a 
marginal  rent  of  20s.  per  acre ;  superior  qualities 
of  wheat  land  might  take  higher  rents  rising  to 
40s.  Suppose  that  some  of  the  land  rented  at 
30s.  had  another  use  which  would  yield  a  rent  of 
29s. ;  it  is  evidently  this  land  which  fixes  the  mar- 
ginal rent;  it  must  receive  30s.  in  order  to  induce 
it  to  contribute  to  the  wheat  supply,  and  the  20s. 
taken  by  the  worst  land  measures  its  inferiority 
of  wheat-growing  power  as  compared  with  the  30s. 
land.  It  is  possible  that  the  20s.  land  might  con- 
tinue to  grow  wheat,  however  little  rent  was  paid ; 
its  rent  is  directly  determined  by  the  cost  of  keep- 
ing in  the  supply  of  wheat  land  the  suj)erior  land 
at  30s.  In  such  a  case  it  Avill  be  the  30s.  land  and 
not  the  20s.  land  which  is  the  direct  determinant 
of  price  for  the  supply  side  in  the  market  for  sale 
of  wheat-growing  power.  The  Ricardian  analysis 
has,  in  fact,  laid  undue  stress  upon  the  worst  land 
contributing  to  supply,  the  so-called  margin  of 
cultivation.  It  is  important  to  understand  that 
this  margin  has  no  particular  significance  except 
as  furnishing  a  convenient  measure  for  the  ready 
reckoning  of  differential  rents;  it  has  no  deter- 
minant importance.  It  is  the  land  with  an  alter- 
native use,  which  may  or  may  not  be  the  marginal 
land,  that  not  only  determines  price  from  the  supply 
side,  but  determines  the  whereabouts  of  the  margin. 
This  can  easily  be  shown  by  a  closer  examination 
of  the  illustration  just  taken.     It  is  admitted  that 


THE  LAW  OF  RENT.  125 

what  is  really  sold  in  the  bargaining  between  land- 
owners and  cultivators  for  the  use  of  wheat  land 
is  units  of  wheat-growing  power.  The  fact  that 
the  nominal  subject  of  bargain  is  acres  of  different 
kinds  of  wheat  land  must  not  blind  us  to  this 
under-truth.  Suppose  now  that  the  price  per  unit 
of  wheat-growing  power,  as  determined  in  a  market 
set  forth  after  the  manner  of  our  horse-market, 
turned  out  to  be  5s.  per  unit.  This  price,  we  will 
further  supjjose,  is  determined  by  the  owner  of  the 
30s.  land,  which  yields  6  units  per  acre  of  this 
wheat-producing  power,  and  which,  by  the  jDOsses- 
sion  of  an  alternative  use  at  a  price  just  below  30s., 
has  assumed  the  position  of  seller  in  the  "final 
pair."  The  price  5s.  has  been  determined  on  the 
supply  side  by  the  fact  that  it  is  required  to  induce 
this  particular  land  to  contribute  toward  the  sup- 
ply of  wheat  land.  Now  what  about  the  20s.  land, 
the  worst  wheat  land  in  occupation,  the  margin 
of  cultivation,  which  ex-hypothesi  only  yields  4 
units  of  wheat-power  per  acre  ?  It  is  quite  legiti- 
mate to  suppose  that  the  owner  of  this  land,  hav- 
ing no  available  alternative  use  at  any  price 
approaching  20s,,  might  have  been  willing  to  con- 
tribute to  supply  even  if  the  price  per  unit  had 
been  fixed  at  4s.,  and  the  rent  per  acre  consequently 
had  been  at  16s.  instead  of  20s.  In  such  a  case  it 
will  be  evident  that  it  is  the  owner  of  the  30s.  land 
who,  in  fixing  for  the  supply  side  the  price  per 
unit  at  5s.,  determines  the  amount  of  rent  per  acre 


126        THE  ECONOMICS   OF  DISTRIBUTION. 

of  the  land  at  the  margin  of  cultivation.  In  deal- 
ing with  the  price  of  land-use,  as  of  any  other  kind 
of  goods,  it  is  to  the  strongest  bargainer  that  we 
must  look  for  the  direct  and  final  determination 
of  a  price,  and  the  differential  gain  of  the  others 
should  rightly  be  measured  from  him.  It  is  only 
the  conventional  modes  of  selling  and  regarding 
the  sales  of  uses  of  factors  of  production  that 
obliges  us  to  depart  fi'om  this  rule,  and  in  the 
case  of  land  makes  it  convenient  to  measure  dif- 
ferential rents  from  the  worst  land  in  cultivation 
which  contributes  to  the  market. 

But  though  the  differential  rents  thus  calcu- 
lated, not  from  the  subjective  valuation  of  the 
"final  pair"  of  bargainers,  but  from  the  margin 
of  cultivation,  are  not  equivalent  in  amount  to 
the  "  differential  gains  "  reckoned  according  to  our 
market  for  sale  of  ordinary  commodities,  their 
economic  nature  is  not  essentially  different,  for 
they  are  determined  in  the  same  way.  In  so  far 
as  the  price  of  uses  of  factors  of  production  is 
reached  by  competition  and  bargaining  (and  this 
is  our  hypothesis  throughout),  the  mode  of  deter- 
mining rent,  interest,  and  wages  will  be  essen- 
tially the  same  as  that  of  determining  the  price 
of  horses  or  Avheat,  and  in  order  to  understand  the 
theory  of  Distribution  we  must,  while  accepting 
for  convenience  the  different  giading  which  charac- 
terises the  former,  penetrate  to  the  essential  units 
beneath.      In  hind,  we  must  recognise  that  rent  or 


THE  LAW  OF  RENT.  127 

price  of  land-use  is  determined,  just  like  the  price 
of  commodities,  by  the  relative  economic  strength 
of  buyers  and  sellers  bargaining  for  a  given  quan- 
tity of  land-use  and  not  for  a  given  sized  piece  of 
land,  though  the  language  of  these  proceedings  has 
reference  to  the  latter.  The  subjective  valuations 
of  a  single  owner  and  a  single  tenant  (the  final 
pair)  fix  the  limits  for  the  price  of  a  unit  of  this 
land-power,  the  stronger  of  the  two  fixing  the 
price-point.  This  done,  the  rent  per  acre  is  deter- 
mined by  the  net  yield  of  land-power  in  each  grade 
of  land.  If  the  higgling  of  the  market  fixes  the 
price  of  a  unit  at  20s.,  the  best  land  available  for 
that  supply  may  yield  2  units  of  power  per  acre, 
in  which  case  the  rent  per  acre  is  40s.,  the  worst 
land  only  |  an  unit  with  a  rent  of  10s.  per  acre.^ 
Thus  it  appears  that  the  determining  increment 

1  The  treatment  of  rent  as  purchase  money  of  so  much  land- 
power  or  use  of  land  will  only  be  fully  justified  when  the  full 
theory  of  coordination  of  the  factors  in  production  is  grasped. 
One  surface  objection,  however,  may  be  removed  here.  In 
speaking  of  rent  as  the  price  of  quantities  of  land-power,  it 
may  appear  as  if  I  had  committed  myself  to  the  view  that  all 
land  with  some  quantity  of  productive  power  could  command  a 
price.  To  avert  the  appearance  of  this  error  I  have  used  the 
term  "net  yield  of  land-power"  to  indicate  the  power  which 
could  command  a  price.  Unless  the  value  of  the  productivity 
of  a  piece  of  land  exceeds  the  expense  of  working  it,  there  is 
no  "  net  yield  of  land-power,"  and,  therefore,  no  price  for  such 
power.  The  term  "  net  yield  of  land-power  "  represents  in  the 
use  of  land  what  emerges  in  the  case  of  a  machine  or  other  piece 
of  concrete  capital  after  expense  of  working  is  defrayed. 


128        THE  ECONOMICS   OF  DISTRIBUTION. 

of  supply  is  not  necessarily  identical  with  the 
worst  land  contributing  to  that  supply,  commonly 
known  as  the  margin  of  cultivation.  If  the  slack- 
ness of  demand  for  wheat  land  causes  a  fall  of 
rent,  it  is  not  necessaril}^  the  20s.  land  Avhich  passes 
out  of  cultivation;  it  may  be  the  30s.,  if  the  latter 
has  an  alternative  remunerative  use  and  the  former 
has  not. 

The  actual  determination  of  rent  by  this  method 
is,  of  course,  complicated  by  the  fact  that  as  a  rule 
not  merely  one  part  of  the  land  supply,  but  many 
parts,  have  alternative  uses  to  which  they  would 
succumb,  were  the  price  for  one  use  to  fall  below 
a  certain  figure.  But  it  is  reasonable  for  us  to 
assume  that  the  price  per  unit  of  land-use  is  always 
determined  by  the  common  position  of  one  part  of 
supply,  which  at  that  price  is  just  induced  to  con- 
tribute toward  that  supply  in  preference  to  some 
others ;  the  fact  that  at  a  different  price  per  unit 
some  other  land  would  occupy  this  position  need 
not  concern  us. 

Now  since  it  is  convenient  to  retain  the  term 
"margin  of  occupation  or  employment "  to  describe 
the  worst  or  least  efficient  part  of  supply,  some 
other  term  is  needed  to  mark  that  part  which 
occupies  the  determinant  place  in  any  given 
market.  I  propose  to  speak  of  this  portion  as 
"the  determining  portion  of  supply,"  and  of  its 
owner  as  "the  determining  owner."  The  worst 
land  in  cultivation  for  a  particular  supply  will  be 


THE  LAW  OF  KENT.  129 

described,  in  accordance  with  usage,  as  "mar- 
ginal land,"  and  its  rent  as  "marginal  rent." 
"  Differential  rents  "  will  be  the  rents  obtained 
by  lands  of  superior  productivity  contributing 
to  this  supply,  and  will  be  measured  from  the 
margin. 

It  will,  however,  be  useful  sometimes  to  sub- 
stitute the  terms  "specific"  and  "individual"  for 
"marginal  "  and  "differential,"  or  to  conjoin  these 
adjectives  in  order  to  emphasise  certain  aspects  of 
our  application  of  the  Law  of  Rent. 

One  further  distinction  requires  to  be  made. 
Whether  the  determinant  portion  of  supply  of 
land  be  the  worst  land  or  not  makes  no  difference ; 
the  price  of  land-power,  and  so  the  rent  of  different 
qualities  of  land,  appears  to  be  directly  determined 
by  the  fact  that  some  of  the  land  has  an  alternative 
use,  and  that  it  may  refuse  to  contribute  to  the 
supply  unless  a  certain  price  is  paid.  But  though 
the  alternative  price  that  can  be  got  for  some  other 
use  determines  a  lower  limit  of  marginal  rent, 
there  is  nothing  to  prevent  the  marginal  rent 
rising  higher  than  this.  If  the  30s.  land  has  an 
alternative  use,  it  is  possible  that  use  might  yield 
only  25s. ;  now,  though  the  owner  of  that  land 
would  consent  to  take  26s.  rent,  he  may  be  able  to 
get  30s.,  because  there  is,  for  the  time,  an  absolute 
scarcity  of  land  available  for  this  supply.  In  a 
word,  he  may  be  able,  as  the  final  seller,  to  take 
a  forced  gain  of  5s.,  which  corresponds  precisely 


130        THE  ECONOMICS   OF  DISTRIBUTION. 

to  the  "forced  gain"  in  the  price  of  the  horse  in 
our  analysis  of  a  market  for  commodities. 

In  such  a  case  it  might  be  best  to  distinguish 
this  5s.  from  the  other  25s.,  and  to  class  it  as  a 
third  form  of  rent.  Thus,  if  we  took  the  higliest 
rented  land  at  40s.,  we  should  describe  25s.  as  mar- 
ginal rent,  5s.  as  forced  or  scarcity  rent,  and  15s. 
as  a  differential  rent  measuring  the  superior  pro- 
ductivity of  this  land  over  the  land  at  the  margin 
of  employment  for  this  use.  This  would  signify 
that  25s.  was  the  price  necessary  to  make  this 
land  abandon  some  alternative  use  and  enter  this 
particular  supply;  that  its  economic  force  as  a 
bargainer,  within  the  market  of  this  use,  enabled 
it  to  exact  5s.  more,  and  that  15s.  measured  its 
superiority  over  the  absolutely  worst  land  con- 
tributing to  this  supply. 

Though  the  actual  distribution  of  land-uses  in 
a  country  will  never  be  so  regular  as  that  repre- 
sented in  our  illustration,  the  latter  approaches  far 
nearer  to  the  actual  facts  than  does  the  Ricardian 
hypothesis,  and  compels  us  to  perceive  that  for 
many,  if  not  most,  purposes  land  at  the  margin 
of  cultivation  will  pay  a  positive  rent. 

The  argument  from  extensive  cultivation,  though 
quite  valid  for  showing  that  differential  rents  do 
not  enter  price,  lets  into  price  any  rents  which  are 
paid  for  the  use  of  marginal  land  contributing  to 
any  supply.  Land  may  be  graded  according  to  its 
economic  uses;  ilic  differential  rents  will  be  ex- 


THE  LAW  OF  RENT.  131 

eluded;  the  positive  marginal  rents  will  be  in- 
cluded in  the  market  (and  even  in  normal)  prices. 

§  4.  Yet,  though  Adam  Smith,  in  dealing  with 
wine  lands  and  other  cases  of  limited  supplies  of 
land,  J.  S.  Mill,  in  the  formulation  of  the  Laws  of 
Value,  Jevons,  and  other  modern  economists  have 
explicitly  affirmed  that  scarcity  prices  of  land  all 
enter  into  prices.  Professor  Marshall  and  not  a  few 
thinkers  reject  this  view. 

It  is  of  the  utmost  importance  to  understand 
the  grounds  uj^on  which  this  rejection  is  based. 
Jevons  admits  that  a  marginal  rent  enters  into 
expenses  of  production,  "  If  land  which  has  been 
yielding  £2  per  acre  rent,  as  pasture,  be  ploughed 
up  and  used  for  raising  wheat,  must  not  the  £2 
per  acre  be  debited  against  the  expenses  of  pro- 
duction of  wheat?"  1  Marshall,  in  commenting 
upon  this  passage,  urges  that  "there  is  no  con- 
nection between  the  particular  sum  of  <£2  and  the 
expenses  of  production  of  that  wheat  which  only 
just  pays  its  way."^     That  is  to  say,  though  the 

1  Preface,  2d  ed.,  Theory  of  Political  Economy. 

2  Book  V,  Ch.  VIII,  par.  6  (note).  There  is,  however,  a 
curious  passage  in  the  sections  immediately  preceding  this,  in 
which  Marshall  himself  seems  to  admit  that  a  marginal  rent 
does  affect  price.  One  of  the  chief  conditions  affecting  the  nor- 
mal value  of  oats  will  be  "  the  amount  of  land  which  is  capable 
of  growing  oats,  but  for  which  there  is  so  great  a  demand  for 
other  purposes  that  it  affords  a  higher  rent,  when  used  for  them, 
than  when  used  for  growing  oats.  For  the  expenses  of  produc- 
tion of  those  oats  inhich  only  Just  pay  their  icay  are  greater  than 
they  would  be,  were  it  not  that  much  of  the  laud  which  would 


132       THE  ECONOMICS   OF  DISTRIBUTION. 

worst  land  contributing  to  the  wheat  supply  pays 
a  rent  of  £2  per  acre,  no  portion  of  that  rent  enters 
into  price.  This  rejection  of  marginal  rent  from 
price  is  achieved  by  turning  from  the  extensive 
to  the  intensive  margin  of  cultivation. 

Upon  this  mode  of  reasoning  those  economists 
rely  who  assert  that  in  no  case  does  rent  enter  into 
price,  and  who  extend  the  principle  from  agricul- 
tural rent  to  all  other  rents.  The  argument,  first 
plainly  formulated  by  James  Mill,  briefly  and 
occasionally  used  by  Ricardo,  runs  as  follows:  — 

return  the  largest  crops  of  oats  to  the  smallest  outlay  is  diverted 
to  growing  other  crops  that  will  enable  it  to  pay  a  higher  rent 
than  oats  would  afford;  and  therefore  the  rent  that  land  on 
which  oats  could  be  grown  can  be  made  to  pay  for  other  pur- 
poses, though  it  does  not  enter  into  the  expenses  of  production 
and  the  normal  value  of  oats,  yet  does  indirectly  affect  them. 
(Bk.  V,  Ch.  VIII,  par.  5.) 

Marshall  does  not  explain  how  it  "  indirectly  affects  them." 
The  passage  seems  to  admit  that  the  positive  marginal  rent  of 
oat  land,  arising  from  alternative  uses,  will  raise  the  price  of 
oats,  somehow,  without  entering  into  the  marginal  expenses 
of  production,  although  this  is  inconsistent  with  the  opening 
words  of  the  same  paragraph,  where  it  is  said  that  "the 
expenses  of  production  of  those  oats  which  only  just  pay  their 
way  are  greater  than  they  would  be "  if  marginal  oat  lands 
could  be  got  at  no-rent.  The  fact  is  that  Marshall  is  quite 
wrong  from  his  standpoint  in  admitting  that  "the  expenses  of 
production  of  those  oats,  which  only  just  pay  their  way,  are 
greater  than  they  would  be,"  etc.  The  application  of  the 
"dose"  principle  to  an  intensive  margin  of  cultivation,  upon 
which  he  relies  through  his  main  argumeut,  will  oblige  him  to 
ignore  altogether  the  positive  rent  which  must  be  paid  for  the 
extensive  margin  of  oat  land. 


THE  LAW  OF  RENT.  133 

Take  a  given  piece  of  land,  apply  to  it  "  doses  " 
of  capital  and  labour  remunerated  at  the  ordinary- 
rates  of  interest  and  wages.  The  produce  raised 
by  the  earlier  applications  of  capital  and  labour 
will  leave  a  residue,  after  the  fixed  payments  of 
interest  and  wages,  which  will  figure  as  rent. 
The  economic  tillers  of  the  soil  will  increase  the 
number  of  these  "doses"  of  capital  and  labour 
until  the  last  dose  yields  just  enough  to  pay  in- 
terest and  wages,  leaving  nothing  for  rent.  Since 
no  part  of  the  produce  obtained  by  the  application 
of  the  last  "dose"  can  be  reckoned  as  rent,  while 
the  expense  of  raising  this  last  part  of  the  produce 
measures  the  price  of  the  whole  supply,  it  follows 
that  rent  does  not  enter  into  the  price. 

Economists  have  often  evinced  some  hesitation 
in  applying  the  doctrine  that  rent  does  not  enter 
into  prices  to  manufactured  goods ;  but  Professor 
Marshall  has  clearly  shown  that  a  fair  expansion 
of  the  older  argument  requires  us  to  hold  that 
"ground  rent  does  not  enter  into  the  expenses  of 
manufacture."^ 

Now  the  most  curious  feature  of  this  illustration 
is  that  it  can  be  similarly  applied  to  show  that 
interest  and  wages  do  not  enter  into  price. 

Instead  of  taking  a  given  quantity  of  land  and 

applying  additional  doses  of  capital  and  labour, 

let  us  take  a  given  quantity  of  capital  and  apply 

additional   doses   of    labour,    neglecting   for   the 

^  Principles  of  Economics,  2d  ed.,  p.  462. 


134       THE  ECONOMICS   OF  DISTRIBUTION. 

present  the  consideration  of  land.  Let  our  piece  of 
capital  be  the  premises,  stock,  good-will,  etc.,  of 
a  shop.  Apply  to  this  capital  additional  doses 
of  labour  in  the  shape  of  shop  assistants.  The 
assistants  first  engaged  will  earn  not  merely  their 
wages  but  a  considerable  surplus,  which  Avill  go 
as  interest  and  profit  to  the  owner  of  the  business. 
Assuming  there  is  plenty  of  labour  available,  the 
shopkeeper  will  go  on  increasing  the  number  of 
his  shop  assistants  as  long  as  the  last-engaged 
produces  more  value  than  is  represented  in  his 
wages.  At  last  he  will  come  to  a  "  marginal " 
assistant,  who  only  just  produces  the  value  of 
his  wages.  Now  the  shop  goods  into  which  this 
"  marginal  "  assistant  puts  his  work  pay  no  interest 
or  profit;  but  they  are  sold  for  the  same  price  as 
the  other  shop  goods,  and  being  produced  under 
the  least  favourable  circumstances,  i.e.  at  the  mar- 
gin of  labour,  must  be  considered  to  measure  the 
price.  Since  no  portion  of  the  value  added  to 
these  goods  in  the  retail  process  can  figure  as  in- 
terest, so  interest  on  shop  capital  is  no  component 
part  of  the  price.  Or,  again,  take  the  machiner}^, 
stock,  good-will,  etc.,  whicli  constitute  the  capital 
of  a  given  factory.  Here,  too,  after  a  certain  point 
in  the  application  of  labour  is  reached,  the  same 
law  of  diminishing  return  is  found  to  appl}';  each 
"hand  "  beyond  a  certain  number  yields  a  less  and 
less  surplus  of  value  over  and  above  liis  wages, 
until  a  "hand"  is  reached  whom  it  is  just  worth 


TUE  LAW  OF  RENT.  135 

while  to  engage  because  the  value  of  his  work  just 
covers  his  wages.  The  "goods"  made  by  this 
last  hand  evidently  pay  no  interest  or  profit,  and 
as  they  are  precisely  analogous  to  the  grain  pro- 
duced by  the  application  of  the  last  dose  of  capital 
and  labour  to  a  given  piece  of  land,  they  govern 
price,  and  therefore  interest  does  not  enter  into 
the  price  of  manufactured  goods. ^ 

Marshall,  indeed,  in  one  passage,  applies  the 
"  dose  "  illustration  to  show  that  one  of  the  shep- 
herds employed  upon  a  large  sheep  farm  is  to  be 
regarded  as  a  "marginal  shepherd,"  whose  produc- 
tivity only  just  earns  his  wages. ^  But  curiousl}^ 
enough  he  fails  to  recognise  that  he  has  proved 
the  expenses  of  raising  sheep  to  be  determined 
by  this  man's  wages,  and  that  interest  or  profit 
of  farm  capital  does  not  enter  into  the  price  of 
sheep. 

Finally,  we  can  take  a  fixed  quantity  of  labour- 
power  and  apply  to  it  successive  doses  of  capital 
or  land.  First  take  the  energy  and  skill  of  a 
single  business  man  who  borrows  doses  of  capital 
for  a  commercial  enterprise.  The  last  dose  he 
borrows  only  yields  to  him  a  minimum  or  nominal 

1 1  may  here  state  that  I  use  interest  for  the  return  made  for 
use  of  concrete  forms  of  capital  and  not  merely  for  capital  val- 
ued in  money.  When  necessary,  I  distinguish  the  two  as 
"real"  and  "money"  interest.  Thus  alone  can  one  evade 
the  Protean  term  "profit." 

2  Principles,  2d  ed.,  Vol.  I,  p.  667. 


136       THE  ECONOMICS   OF  DISTRIBUTION. 

return  after  paying  its  necessary  interest,  i.e.  he 
cannot  profitably  utilise  any  more.  It  therefore 
appears  that  the  last  increment  of  the  goods  he 
handles  in  his  business  yields  no  earnings  of 
management.  Therefore  earnings  of  management 
form  no  element  in  expenses  of  production  or  of 
price. 

Or  take  the  case  of  an  agriculturist  in  a  country 
where  there  is  plenty  of  available  land  of  a  given 
quality  at  a  fixed  or  customary  rent.  The  produce 
raised  by  such  a  man  upon  the  few  acres  he  first 
rents  may  yield  him,  after  pa3dng  the  stipulated 
rent,  a  large  surplus  which  he  will  take  as  wages. 
Let  this  labourer  increase  the  acreage  he  rents; 
beyond  a  certain  point  he  will  find  that  the  pro- 
portion of  the  produce  obtained  by  each  successive 
application  of  more  land,  which  is  left  for  wages, 
becomes  less  and  less,  until  he  reaches  an  applica- 
tion which,  after  paying  rent,  does  not  increase 
the  net  surplus  which  he  takes  as  wages.  In  other 
words,  the  produce  obtained  by  this  marginal 
application  of  land  to  labour  "pays"  no  wage. 
Since  this  marginal  produce  measures  and  indi- 
cates the  price  of  the  whole  supply,  wages  do  not 
enter  into  that  price.  Now  in  respect  to  the 
supply-price  of  agricultural  produce  in  any  given 
market,  it  is  held  that  rent  does  not  enter  into 
price  because  a  portion  of  that  supply  is  obtained 
under  conditions  which  preclude  any  part  of  it 
from  counting  as  rent.     So  it  must  be  held  that 


THE  LAW  OF  RENT.  137 

wages  do  not  enter  into  the  price  because  another 
portion  of  that  supply  may,  as  we  have  seen,  have 
been  obtained  under  conditions  which  forbid  any 
of  it  from  contributing  to  wages,  while  interest 
does  not  enter  into  price  because  a  third  portion 
is  raised  under  conditions  which  require  that  it 
all  go  for  rent  and  wages  and  none  of  it  for 
interest.  We  have  only  to  suppose  three  pro- 
ducers —  the  first  of  whom  has  a  fixed  quantity  of 
land,  and  keeps  adding  fresh  doses  of  capital  and 
labour;  the  second  with  a  fixed  quantity  of  capital, 
which  he  spreads  over  increasing  quantities  of 
land  and  labour;  and  the  third  with  a  fixed  quan- 
tity of  labour,  to  which  he  applies  ever  increasing 
quantities  of  land  and  capital  —  to  arrive  at  the 
conclusion  that  neither  rent,  interest,  nor  wages 
is  a  component  part  of  "price." 

To  this  reductio  ad  absurdum  we  are  inevitably 
brought  by  following  out  the  line  of  argument 
usually  adduced  to  show  that  rent  does  not  enter 
into  price. 

§  5.  This  line  of  reasoning,  however,  though 
it  compels  the  admission  of  a  fundamental  error 
in  the  "dose"  illustration  as  applied  to  intensive 
cultivation,  does  not  explain  the  nature  of  that 
error.  The  truth  is  that  a  certain  harmony  of 
combination  of  factors  of  production  exists  for 
various  productive  purposes.  In  a  given  case,  a 
certain  proportion  of  the  three  factors  of  produc- 
tion is  most  productive.     If,  however,  there  is  a 


138       THE  ECONOMICS   OF  DISTRIBUTION. 

short  supply  of  one  of  them  at  the  former  quality 
and  price,  a  more  than  proportionate  increase  of 
one  or  both  of  the  others  may  be  substituted,  in- 
volving, of  course,  an  increased  cost  per  unit  of 
the  increment  of  supply. 

So  when  the  final  dose  of  capital  and  labour  on 
a  given  piece  of  wheat  land  achieves  a  product 
which  yields  no  rent,  it  means  that  with  the  same 
quantity  of  land-use  as  sufficed  for  a  smaller 
product,  a  larger  quantity  of  capital  and  labour- 
use  has  been  combined;  that  as  no  more  land-use 
was  employed,  none  was  paid  for. 

Or,  if  it  seems  more  reasonable,  we  may  consider 
a  piece  of  land  as  containing  various  land-powers, 
some  high,  some  low  —  some  powers  so  low  that 
they  require  so  large  a  proportion  of  capital  and 
labour  to  utilise  them  that  they  only  just  pay  to 
Avork.  These  low  natural  powers  yield  no  net 
economic  powers  of  production. 

Now  take  the  case  where  a  portion  of  the  final 
increment  of  a  supply  of  wheat  is  raised  on  the 
extensive  margin  at  a  positive  rent  of  2  units,  and 
a  portion  upon  the  intensive  margin  where  it  is 
held  to  pay  no  rent.  It  is  evident  that  the  cost 
of  production  is  the  same  in  each  case,  though  rent 
forms  2  units  of  cost  (out  of  say  10)  in  one  case 
and  none  in  the  other.  Where  the  intensive  mar- 
gin is  taken,  2  more  units  of  cost  of  use  of  capital 
and  labour  arc  found.  The  man  \vho  chooses  be- 
tween   paying   for   worse    laud-use    or   for   more 


THE  LAW  OF  BENT.  139 

capital-  and  labour-use  exercises  a  choice  between 
the  factors  of  production  which  implies  their 
interchangeability.  Either  land-power  oi'  capital- 
and  labour-power  may  do  the  extra  work  required 
to  raise  the  last  increment;  if  the  former  is  pre- 
ferred, rent  is  paid ;  if  the  latter,  rent  is  not  paid, 
but  more  profit  and  wage.  This  interchangeability 
is  a  fact  of  prime  importance  in  understanding  the 
theory  of  distribution. 

If,  because  land-use  can  be  replaced  by  capital- 
use,  we  choose  to  say  that  rent  does  not  enter 
money-cost  of  production,  we  are,  strictly  speak- 
ing, justified  in  doing  so.  But  by  a  similar  argu- 
ment it  is  possible  to  show  that  interest  and  wages 
need  not  enter  money-cost  of  production. 

The  last  increment  of  cotton  cloth  in  the  supply 
may  be  the  produce  of  the  worst  loom  in  the  worst- 
equipped  mill  (/.e.  raised  on  the  extensive  margin 
of  capital),  or  it  may  be  the  produce  of  a  good 
loom  in  a  good  mill  working  overtime:  in  the 
former  case  it  is  partly  produced  by  capital-use, 
which  may  be  paid  by  interest;  in  the  latter  case 
there  is  no  extra  call  on  capital.  (Or  taking  the 
analogy  of  lower  un-paid  powers  of  land,  we  may 
say  that  lower  power  of  capital  entered  in  unpaid.) 
In  the  former  case,  the  final  increment  of  cotton 
cloth  yields  an  interest;  in  the  latter  case,  it  only 
just  pays  overtime  wages;  bj^  taking  the  latter 
case,  we  prove  that  interest  forms  no  element  in 
the  price  of  cotton  cloth.     But  it  must  be  observed 


140       THE  ECONOMICS   OF  DISTBIBUTION. 

that  the  money-cost  and  the  price  of  the  final 
increment  of  the  cotton  cloth  will  be  the  same, 
whether  it  is  said  to  include  profit  or  not. 

§  6.  We  have  shown  how  rent  need  not  enter 
money-cost  of  production  and  price  of  wheat 
where  the  final  increment  is  produced  on  the  in- 
tensive margin.  By  a  similar  application  of  the 
Law  of  Substitution  it  can  be  shown  that  wage 
may  or  may  not  enter  into  the  price  of  this  same 
final  increment  of  wheat.  Suppose  it  is  raised  by 
a  tenant-farmer  as  part  of  the  result  of  an  extra 
last  hoeing  and  ploughing  on  his  land,  it  pays 
extra  wages  but  no  rent;  if,  however,  instead  of 
this  extra  hoeing  and  ploughing  the  farmer  decided 
to  hire  one  more  acre  of  the  same  quality  of  land 
and  spread  the  same  amount  of  labour-power  over 
the  larger  area,  the  product  of  this  last  acre  pays 
its  rent  but  no  wage. 

Or,  again,  take  the  case  of  a  4-loom  weaver  ^  who 
decides  it  is  just  worth  his  while  to  undertake 
a  5th  loom;  the  product  of  the  5tli  loom,  after 
paying  a  profit  and  a  compensation  for  extra  wear 
and  tear  to  the  weaver,  yields  him  no  true  increase 
of  wage.  The  real  wage,  or  net  advantage,  which 
he  obtains  by  working  5  looms  only  exceeds  by 
a  nominal  amount  the  net  advantage  of  working 
4  looms. 

^  The  assumption  here  is  that  the  weaver  is  on  time  wages. 
The  rarity  of  such  an  occurrence  need  not  be  taken  to  invali- 
date the  illustration. 


THE  LAW  OF  RENT.  141 

The  labour  of  working  the  5th  loom  or  the  last 
acre  of  land  is  certainly  remunerated  by  wages, 
and  at  the  same  rate  as  the  other  looms  or  other 
acres.  Why,  then,  does  it  appear  from  the  "dos- 
ing "  illustration  that  the  product  of  the  last  loom 
or  last  acre  pays  no  wage  ? 

Only  two  replies  are  possible.  First,  it  is  pos- 
sible to  suppose  that  the  weaver's  capacity  was 
underrated,  and  that  he  had  been  put  to  4  looms 
when  his  normal  energy  was  equal  to  5  looms. 
Now  it  is  evident  that  if  a  5-loom  weaver  is 
set  to  work  4  looms,  there  is  an  absolute  waste 
of  labour-power;  if  the  mistake  is  discovered,  and 
the  waste  stopped  by  adding  a  5th  loom,  the 
weaver,  assuming  he  were  on  time  wages,  might 
receive  no  additional  wage.  Similarly,  we  may 
suppose  that  the  farmer  underestimates  the  number 
of  acres  upon  which  he  may  most  profitabl}^  spread 
his  labour-power;  discovering  his  mistake,  he  may 
add  the  extra  acre  which  seems  just  to  pay  its  rent 
and  leave  nothing  for  his  wage. 

Now  the  sophistry  of  these  examples  is  patent. 
If  an  employer  hires  a  worker  and  misapplies  his 
working  power,  he  must  pay  as  much  as  if  he  had 
properly  applied  it;  if  a  farmer  does  not  under- 
stand the  economy  of  his  labour-power,  he  may 
expend  upon  a  smaller  area  the  same  quantity  of 
power  which  he  ought  to  have  bestowed  upon  a 
larger  area.  If  a  tenant  hires  a  piece  of  land  and 
puts  5  doses  of  capital  upon  it  when  he  ought  to 


142       THE  ECONOMICS   OF  DISTRIBUTION. 

have  put  6,  lie  pays  a  rent  based  upon  the  suppo- 
sition that  he  will  make  a  full  economic  use  of  the 
land,  i.e.  that  he  Avill  put  6  doses  on  it.  If,  dis- 
covering his  error,  he  afterward  adds  the  sixth 
dose,  he  only  appears  to  pay  no  rent  out  of  its 
produce,  because  he  has  all  the  time  been  paying 
a  rent  based  upon  the  supposition  that  he  was 
working  his  land  with  6  doses. 

The  conclusion  is  a  peculiarly  simple  one.  If 
we  make  an  uneconomical  use  of  a  factor  of  pro- 
duction, we  must  pay  the  same  price  for  it  as  if 
we  made  an  economical  use  of  it. 

Some  of  the  "dosing"  illustrations  are  thus 
vitiated  by  treating  the  owner  of  a  factor  of  pro- 
duction as  if  he  were  not  an  "economic  man," 
whereas  the  just  application  of  a  principle,  like 
the  Law  of  Diminishing  Returns,  does  not  permit 
such  an  assumption  to  be  made.^ 

§  7.  But  the  "  dosing  "  illustration  is  vitiated 
by  a  more  fundamental  flaw.  By  assuming  the 
separate  action  of  each  dose,  it  ignores  the  organic 
relation  of  parts  in  industry.  It  is  not  necessary 
to  suppose  that  the  5th  loom  was  added  to  the 

1  If  I  rent  a  piece  of  land  in  Piccadilly,  in  which  all  houses 
are  3  or  4  stories,  the  rent  I  shall  pay  will  take  into  considera- 
tion the  capacity  of  the  ground  for  building  a  3-  or  4-story 
house.  If  I  choose  to  put  a  1 -story  house  upon  the  ground,  the 
rent  I  pay  will  bu  tlie  same  as  if  I  had  more  fully  utilised  the 
site.  If  afterward  I  add  stories,  it  will  seem  that  I  pay  no  rent 
for  this  extra  accommodation,  but  in  reality  I  have  been  paying 
it  all  the  time. 


THE  LAW  OF  RENT.  143 

weaver  because  it  was  found  out  that  he  had  been 
paid  as  a  5-k)om  weaver  while  he  had  been  work- 
ing at  4  looms.  We  may  suppose  that  he  is  in 
full  knowledge  of  the  facts  and  has  a  full  exercise 
of  choice ;  as  a  consequence,  he  estimates  that  it 
just  pays  him  to  work  5  looms  instead  of  4.  Now 
why  will  it  appear  that,  whereas  the  weaver,  when 
working  4  looms,  made  a  net  wage  on  each  of  them, 
he  makes  a  merely  nominal  wage  on  the  5th  loom  ? 
The  5th  loom,  after  it  is  added,  is  found  to  be 
just  as  productive  as  any  of  the  other  4  looms. 
The  answer  is  plain.  The  5th  loom  only  just 
pays  because  its  addition  has  injured  his  work 
with  the  other  4  looms ;  he  must  work  5  looms  at 
slower  speed  than  he  worked  4,  stoppages  will  be 
more  frequent,  more  time  must  be  spent  on  tun- 
ing, cleaning,  etc.  If  he  gives  out  the  same  work- 
ing energy  to  5  looms  as  formerly  he  gave  to  4 
(which  supposition  is  involved  in  our  hypothesis 
that  to  a  fixed  quantity  of  labour-power  is  added 
a  fresh  increment  of  capital),  the  effort  of  adding 
the  last  loom  can  only  be  estimated  by  taking 
account  of  its  influence  upon  the  productivity  of 
the  other  4  looms. 

So,  reverting  to  our  illustration  of  a  fixed  quan- 
tity of  shop-capital  which  for  its  most  profitable 
working  requires  10  shop-assistants.  The  tenth 
shopman,  whichever  he  may  be,  appears  only  just 
to  produce  enough  to  pay  his  wages,  because  it  is 
evident  that  it  would  not  pay  to  put  in  an  eleventh 


144       THE  ECONOMICS  OF  DISTRIBUTION. 

shopman.  But  the  productivity  of  this  last  unit 
of  labour  cannot  be  rightly  separated  from  the  pro- 
ductivity of  the  other  units,  as  is  supposed  when  a 
particular  additional  increment  of  product  is  at- 
tributed to  his  presence.  The  service  of  this  final 
unit  of  shop-labour  largely  consists  in  enabling 
the  shop  to  be  better  ordered,  and  a  better  division 
of  labour  to  be  adopted;  in  other  words,  it  helps 
to  raise  the  general  efiBciency  of  all  the  labour 
employed. 

The  same  is  true,  though  within  narrower 
limits,  of  the  effect  of  the  last  dose  of  capital 
applied  to  a  given  piece  of  land ;  its  effect  is  not 
a  separate  one,  but  partly  consists  in  the  greater 
efficiency  imparted  to  earlier  units.  Suppose  the 
last  unit  of  capital  to  be  represented  by  improved 
fencing  or  drainage ;  this  has  evidently  an  impor- 
tant influence  in  increasing  the  efficiency  of  the 
earlier  units  of  capital. 

There  is  a  false  separatism  in  the  "dosing" 
illustration  which  ignores  the  organic  unity  in  a 
business.  No  light  is  thrown  either  upon  the 
theory  or  the  practice  of  industry  by  treating  one 
Factor  of  Production  as  a  constant  quantity  and 
two  as  variables. 

§  8.  Thus  we  perceive  that  the  fallacy  of  the 
"dosing"  illustration  consists  in  assigning  a 
particular  amount  of  productivity,  and  therefore 
of  "product,"  to  a  particular  dose.  Professor 
Marshall,  in  treating  the  marginal  dose  of  labour 


TUB  LAW  OF  BENT.  145 

in  agriculture  Qe.g.  the  last  hoeing  applied  to  a 
field),  admits  that  "the  return  to  that  last  dose 
cannot  be  separated  from  the  others,"  but  he  adds 
"  we  ascribe  to  it  all  that  part  of  the  produce  which 
we  believe  would  not  have  been  produced  if  the 
farmer  had  decided  against  the  extra  hoeing." 
(Bk.  IV,  Ch.  Ill,  par.  2.) 

Here  we  probe  the  heart  of  the  "  dosing  "  fallacy. 
It  is  claimed  that  the  product  of  the  last  dose  of 
labour  is  to  be  measured  by  the  reduction  in  the 
aggregate  product  of  the  farm  which  would  have 
attended  the  refusal  to  apply  this  last  dose  of 
labour.  Now  this  is  not  justifiable.  The  with- 
drawal or  refusal  to  apply  this  last  dose  of  labour 
would  have  meant  a  diminished  productivity,  not 
only  of  the  other  units  of  labour,  but  of  the  units 
of  capital  and  of  land,  and  part  of  the  result  of 
this  diminished  productivity  of  other  units  is 
wrongly  attributed  to  the  last  unit  of  labour. 

For  let  us  see  how  this  mode  of  measuring  the 
productivity  of  the  last  increment  applies.  Let  us 
suppose  that  a  farm  business  is  composed  of  4  doses 
of  labour,  6  doses  of  land,  3  doses  of  capital,  this 
being  the  combination  of  the  factors  which  is  eco- 
nomically advantageous.  Now  in  order  to  measure 
the  productivity  of  the  last  dose  of  labour,  let  us 
remove  it.  The  diminution  of  the  total  product 
may  be  8%.  This  8%,  according  to  Marshall's 
method,  we  ascribe  to  the  last  dose  of  labour.  If 
now,  restoring  this  dose  of  labour,  we  withdrew 


146       THE  ECONOMICS   OF  DISTRIBUTION. 

the  last  dose  of  capital,  the  reduction  of  product 
might  be  10%.  This  10%  is  regarded  as  the 
product  of  the  last  dose  of  capital.  Similarly,  the 
withdrawal  of  the  last  dose  of  land  might  seem  to 
reduce  the  product  by  10%.  What  would  be  the 
effect  of  a  simultaneous  withdrawal  of  the  last 
dose  of  each  factor?  According  to  Marshall's 
method,  clearly  28%.  But  is  this  correct?  Is  it 
not  likely  that  this  simultaneous  withdrawal  might 
reduce  the  product  not  by  28%,  but  by  (say)  18%  ? 
According  to  Marshall,  the  whole  of  the  8%  which 
disappears  on  the  withdrawal  of  the  last  dose  of 
labour  is  to  be  regarded  as  the  product  of  that 
dose.  But  part  of  that  8%  will  consist  in  the  re- 
duced productivity,  not  only  of  the  other  labour- 
doses,  but  of  the  doses  of  capital  and  land.  The 
withdrawal  of  the  last  dose  of  labour  may  well  be 
supposed  to  reduce  in  particular  the  utility  of  the 
last  dose  both  of  capital  and  of  land,  which  factors 
are  now  in  excess.  Similarly,  the  withdrawal  of 
the  last  dose  of  capital  will  affect  the  productivity 
of  the  last  dose  of  labour  and  of  land.  The  with- 
drawal of  a  dose  of  land  will  act  in  the  same  wa}'- 
upon  the  last  doses  of  labour  and  capital.  We 
should  thus  find  that  the  simultaneous  withdrawal 
of  the  last  dose  of  the  three  factors  would  be  con- 
siderably less  than  the  28%  which  Marshall's  mode 
of  measurement  requires.  For  the  withdrawal  of 
the  last  laljoui'-dosc  involves  a  nullification  of  a 
part  of  the  [)r()(Lictivity  of  the  last  unit  of  capital 


THE  LAW  OF  RENT.  147 

and  of  land,  and  a  part  of  the  result  thus  attributed 
to  labour  is  due  to  the  diminished  productivity  of 
the  other  factors.  Put  the  same  experiment  upon 
its  broadest  footing,  and  the  overlapping  fallacy 
becomes  obvious.  Take  the  labour,  capital,  and 
land  as  consisting  of  a  single  dose  of  each;  now 
withdraw  the  dose  of  labour,  and  the  whole  service 
of  capital  and  land  disappears.  Is  the  destruction 
of  the  whole  product  a  right  measure  of  tlie 
separate  productivity  of  the  labour-dose  alone? 
Obviously  not;  for  if  the  dose  of  capital  had  been 
withdi'awn  instead,  or  the  dose  of  land,  the  same 
effect  would  have  ensued. 

§  9.  Causation  may  indeed  be  proved  by  what 
is  called  in  logical  text-books  the  Method  of 
Difference,  but  the  composition  of  causes  pre- 
vents quantitative  effect  from  being  proved  in 
this  manner.  The  "  dose  "  illustration  is  nothing 
else  than  a  slightly  more  intricate  example  of  the 
fallacy  which  confuses  mechanical  composition 
with  organic  cooperation.  Where  it  is  essential 
to  productivity  that  land,  capital,  and  labour 
shall  all  cooperate,  it  is  impossible  to  assign  to 
any  one  of  them  a  product  based  on  the  supposi- 
tion of  a  separate  productivity.  Similarly,  where 
there  exists  a  necessary  organic  quantitative  rela- 
tion between  the  factors,  no  separate  product  can 
be  put  down  to  any  single  dose  of  each. 

The  root-fallacy  of  the  "  dose  "  illustration  con- 
sists, then,  in  a  false  separation  which  ignores  the 


148       THE  ECONOMICS   OF  DISTRIBUTION. 

organic  nature  of  production  and  the  Law  of  Sub- 
stitution. The  real  determinant  of  price  of  a 
supply  from  the  "cost"  side  will  be  found  to 
reside  in  the  comparative  advantage  of  employing 
various  combinations  of  the  factors  of  production. 
In  considering  how  a  new  increment  of  wheat 
supply,  evoked  by  rising  prices,  will  be  produced, 
nothing  is  learnt  by  supposing  it  to  be  raised  by 
applying  a  new  unit  of  capital  and  labour  to  wheat 
land  already  in  use.  The  real  problem  for  con- 
sideration will  be,  "  What  changed  proportion  of 
the  several  factors  will  most  easily  turn  out  the 
increased  supply?"  Should  more  labour  be  ap- 
plied to  the  same  land,  or  should  more  land  be 
worked  by  the  same  labour,  or  should  more  capital 
be  added,  or  what  should  be  the  conjunction  of 
additional  factors  ? 

The  net  result  of  this  argument  is  that  the 
application  of  the  Law  of  Rent  to  the  intensive 
cultivation  of  a  single  factor  must  be  rejected  as 
fallacious. 

The  chief  use  of  the  "dose"  illustration  has 
been  to  support  the  theory  that  rent  of  land 
differs  radically  from  all  payments  for  uses  of 
other  requisites,  in  that  it  is  a  surplus  which, 
being  measured  from  a  no-rent  margin,  does  not 
form  an  element  of  price.  Whereas  it  appeared 
that  land  at  the  extensive  margin  of  cultivation 
for  all  higher  uses  paid  a  positive  rent,  it  was 
sought  to  exclude  this  rent  from  price  by  arguing 


TUE  LAW  OF  RENT.  149 

that  a  portion  of  the  supply  might  be  raised  upon 
an  intensive  margin,  where  no  rent  was  paid  even 
for  supplies  toward  which  no-rent  land  did  not 
contribute. 

§  10.  The  complete  breakdown  of  this  intensive 
margin  throws  us  back  once  more  upon  the  exten- 
sive margin  for  the  sole  legitimate  application  of 
the  Law  of  Rent. 

We  have  already  recognised  what  qualification 
of  this  law  is  necessary.  While  the  generally 
accepted  statement  of  the  law  holds  good  in  the 
case  of  the  lowest  or  least  remunerative  use  of 
land  where  the  margin  of  cultivation  pays  no  rent, 
it  must  be  qualified  in  the  case  of  land  put  to 
higher  uses  b}-  the  recognition  of  a  series  of  higher 
margins  of  cultivation  where  a  positive  rent  is 
paid  for  the  worst  land  in  use.  The  differential 
rents  for  each  particular  piece  of  land  will  be 
measured  from  the  no-rent  margin  only  in  the  case 
of  lands  competing  for  the  lowest  use;  the  dif- 
ferential rents  of  lands  for  higher  uses  will  be 
measured  from  a  specific  margin  which  pays  a 
rent.  While  these  differential  rents  will  form  no 
element  in  prices,  the  marginal  rents  will  enter 
as  an  expense  of  production  that  is  common  to  the 
whole  supply.  If  the  marginal  hop  land  in  use 
pays  a  rent  of  i£2  an  acre,  a  portion  of  that  sum 
will  be  represented  in  the  price  of  each  pocket  of 
hops. 


150       THE  ECONOMICS   OF  DISTRIBUTION. 


Part  II. 

§  1.  While  there  has  been  a  growing  tendency 
among  recent  economists  to  extend  the  term 
"rent"  and  the  application  of  the  Law  of  Rent 
to  capital  and  to  labour,  as  a  rule  this  has  been 
done  tentatively,  rather  by  way  of  analogy  than 
as  a  recognition  of  the  application  of  a  common 
law. 

A  true  coordination  of  the  factors  of  production 
which  shall  enable  us  to  bring  them  all  alike,  in 
respect  to  the  sale  of  their  uses,  under  the  general 
laws  of  price  which  are  operative  in  the  markets 
of  commodities,  requires  that  we  first  show  how 
the  law  of  rent  in  its  extensive  application  is  valid 
for  each  factor. 

The  difficulties  which  confront  us  in  this  work 
chiefly  arise  from  the  adoption  in  economic  treat- 
ment of  a  terminology  which  expresses  loose  popu- 
lar modes  of  regarding  land,  labour,  and  capital, 
and  are  mainly  two. 

§  2.  The  first  difficulty  arises  from  a  radical 
difference  in  the  common  mode  of  represent- 
ing capital  on  the  one  hand,  labour  and  land 
on  the  other.  Whereas  the  two  latter  are  re- 
garded in  tlieir  concrete  forms,  the  land  in  its 
acres,  the  labour-power  in  its  daily  or  weekly  out- 
put of  cncj'g}',  we  commonly  regard  capital  not  in 


THE  LAW  OF  BENT.  151 

the  concrete  shapes  of  plant,  raw  material,  and 
goods,  which  are  its  serviceable  forms  for  indus- 
try, but  in  its  money  value  of  so  many  XlOO's. 
Whereas  the  payment  to  land  and  labour  is  pay- 
ment for  the  use  of  the  concrete  forms,  payment 
for  capital  is  payment  for  the  use  of  so  much  of 
this  abstract  force  measured  by  j£100's. 

Now  it  is  evident  that  no  common  law  of  price 
or  value  can  be  applied  to  the  use  of  the  three 
factors,  unless  we  place  them  upon  a  common  foot- 
ing. Either  we  must  measure  land  and  labour 
by  their  abstract  or  money  measurement,  capital- 
ising them  and  regarding  rent  and  wages  as 
payment  for  the  use  of  so  many  <£100's  of  this 
land-capital  or  labour-capital,  or  else  when  we 
speak  of  capital,  we  must  speak  of  the  concrete 
forms,  of  goods,  plant,  etc.,  which  are  used  in 
industry.  The  actuality  of  a  science  of  industry 
as  distinguished  from  a  science  of  finance  requires 
us  to  take  the  latter  course,  and  to  treat  capital 
as  consisting  not  in  money  but  in  concrete  forms 
of  wealth  serviceable  in  production. 

The  payment  for  the  use  of  this  concrete  capital 
is  interest.  Since  this  latter  term  is  by  usage 
closely  confined  to  the  price,  not  of  concrete  capi- 
tal but  of  money  capital,  I  should  have  preferred 
to  adopt  some  other  term.  But  none  other  is 
available  excepting  the  still  more  slippery  term 
"profit."  I  propose,  therefore,  to  use  th(^  l{>rm 
"interest"  for  the  payment  of  the  use  of  concrete 


152       THE  ECONOMICS   OF  DISTRIBUTION. 

capital,  distinguishing  it  where  necessary  from 
financial  interest  by  appending  the  term  "real" 
to  the  former,  "money"  to  the  latter. 

It  is,  of  course,  evident  that  no  coordination  of 
capital  with  land  by  application  of  a  law  of  rent 
is  possible  where  capital  takes  the  fluid  form  of 
money.  For  no  "rents,"  either  specific  or  individ- 
ual, could  emerge  from  such  uses  of  capital.  It 
is,  of  course,  incorrect  to  say  that  <£100  of  capital 
in  one  employment  earns  21%  interest  and  another 
XlOO,  elsewhere  employed,  5%.  The  extra  2|-%  in 
what  seems  the  better  investment  will  either  not 
be  interest  at  all,  but  compensation  for  special 
risks,  or  it  will  by  its  very  existence  raise  the 
capital  from  £100  to  .£200.  For  under  present 
circumstances  £100  of  capital  simply  means  so 
much  capital  as  will  bring  £2. 10s.  interest  per 
annum  to  its  owner.  A  proper  business  valuation 
of  all  capital  is  a  valuation  based  upon  the  rate  of 
interest.  Ex  hi/pothesi,  therefore,  there  can  be 
only  one  true  rate  of  interest  for  all  this  fluid 
abstract  capital.  Business  habits  often  persist  in 
speaking  of  capital  as  £100,  when  the  increased 
annual  value  of  the  concrete  forms  represented  has 
raised  it  to  £200,  so  that  one  £100  share  may  be 
spoken  of  as  paying  5%,  but  the  market  or  selling 
value  of  course  would  be  £200  and  the  true  interest 
still  21%. 

No  relation  is  possible  between  this  capital  and 
our  other  factors  of  production.     We  must  deal 


THE  LAW  OF  RENT.  153 

with  the  concrete  forms  which  are  thus  valued. 
What  is  paid  for  their  use  is  real  interest. 

§  3.  When  we  have  placed  the  factors  of  pro- 
duction upon  the  common  concrete  basis  and  agreed 
upon  a  term  to  describe  the  payment  of  the  use  of 
concrete  capital,  we  are  confronted  with  another 
difficulty.  In  measuring  the  value  of  land,  a 
margin  of  cultivation  is  found  to  be  of  essential 
importance,  and  our  examination  of  the  law  of 
rent  has  clearly  indicated  the  need  of  substituting 
a  joint-margin,  composed  of  all  the  factors,  for  a 
margin  of  land  only.  But  can  we  legitimately 
extend  the  conception  of  a  margin  of  employment 
to  capital  and  labour?  The  initial  difficulty  takes 
this  form.  The  worst  land  in  cultivation  for  the 
lowest  use  (say  grazing  land)  pays  no  rent;  can 
we  say  that  the  worst  placed  capital  will  yield  no 
profit  and  the  worst  labour  in  employment  obtain 
no  wage? 

First,  as  to  capital,  whether  it  be  true  or  not 
that  the  prospect  of  obtaining  interest  is  a  neces- 
sary motive  to  induce  the  creation  of  capital,  it 
may  distinctly  be  affirmed  that  interest  is  not 
necessary  to  secure  the  economic  maintenance  of 
forms  of  capital  which  have  been  brought  into 
existence.  What  is  needed  for  the  continuous 
existence  of  forms  of  capital  is  a  provision  against 
wear  and  tear  or  depreciation;  this  charge  upon 
gross  profits  is  not  interest,  but  is  a  deduction 
prior  to  payment  of  any  interest.     A  business  pay- 


154        THE  ECONOMICS   OF  DISTRIBUTION. 

ing  the  minimum  or  merely  nominal  interest  on 
its  invested  capital  must,  if  it  is  properly  con- 
ducted, have  made  provision  for  the  maintenance 
of  its  plant  and  other  forms  of  capital.  Though 
some  positive  interest  may  be  necessary  to  bring 
into  use  new  forms  of  capital,  it  is  not  required 
to  maintain  old  forms.  This  Walker  has  rightly 
recognised  by  insisting  that  the  idea  of  no-rent 
land  must  be  extended  to  no-profit  businesses,  and 
that  the  profits  of  better  businesses  may  be  meas- 
ured from  this  margin,  as  the  rents  of  land  are 
measured  from  a  no-rent  margin. 

Indeed,  the  more  closely  we  look  at  the  real 
supply  of  land  and  capital,  the  more  artificial  and 
the  more  unjustifiable  appears  the  abrupt  distinc- 
tion made  by  earlier  economic  theories.  Mere 
land  does  not  figure  in  supply.  Land  in  its 
natural  state  —  "prairie  land"  —  is  not  really  a 
factor  of  production.  Its  so-called  "  inherent 
and  indestructible  properties  "  have  no  value  until 
the  land  is  cleared  and  broken  in,  until  some  ex- 
penditure of  labour  is  made  upon  it.  In  this 
sense  there  is  a  cost  of  prodncing  a  supply  of  land 
roughly  corresponding  to  the  cost  of  producing 
capital.^  Again,  just  as  the  continued  existence 
of    capital    is    secured   by   a    constant    provision 

1  Professor  S.  N.  Patten  has  shown  {rremiscs  of  Political 
Economy)  how  this  cost  of  production  of  land  impairs  the 
exactitude  of  the  measurement  of  rent,  because  "the  laws 
which  regulate  the  bringing  of  new  lands  Into  cultivation,  and 


TlIK  LAW   OF  RENT.  155 

against  depreciation,  so  the  powers  of  land  for 
most  purposes  are  not  indestructible,  but  demand 
a  constant  outlay.  The  abstraction  of  an  eco- 
nomic land  for  which  economic  rent  is  paid  is  on 
the  whole  a  singularly  futile  and  confusing  one. 
The  worst  capital  and  the  worst  land  in  economic 
use  alike  require  a  provision  against  wear  and  tear 
which  is  neither  interest  nor  rent,  while  the  in- 
terest and  rent  paid  for  their  use  is  a  merely 
nominal  amount. 

§  4.  Now  the  case  of  labour  seems  different, 
but  the  difference  arises  merely  from  the  adoption 
of  inconsistent  terminology.  Whereas  the  fund 
for  keeping  forms  of  land  and  capital  in  existence 
is  not  termed  rent  or  profit,  the  fund  for  keeping 
in  economic  existence  repositories  of  labour-power 
is  included  under  "wages."  Thus  it  comes  to 
pass  that  while  the  margin  of  land  is  no-rent  land, 
the  margin  of  capital  no-interest  capital,  the  mar- 
gin of  labour  is  (say)  15s.  labour. 

In  order  to  clear  the  problem  of  price  in  distri- 
bution, it  is  essential  to  remove  this  anomaly. 
This  15s.  wage  does  not  in  any  sense  correspond 
to  interest  or  to  rent.  It  is  simply  a  wear-and- 
tear  fund  of  labour,  the  expenditure  necessary  to 
replace  the  labour-power  given  out  in  a  day's  work, 

those  according  to  which  land  will  be  withdrawn  from  cultiva- 
tion, are  very  different,"  affording  "a  large  margin  within  which 
the  price  of  produce  may  vary  without  a  change  in  the  quantity 
produced." 


156       THE  ECONOMICS   OF  DISTRIBUTION. 

and  to  maintain  the  labouring  population  at  their 
present  numbers  and  at  their  present  efficiency. 
The  logical  coordination  of  factors  of  production 
requires  that  this  wear-and-tear  or  depreciation 
fund  shall  be  distinguished  from  the  additional- 
payment  which  most  labourers  receive.  It  is 
wages  above  15s.  that  correspond  to  positive  rent 
or  interest.  If  the  term  "  wage  "  could  be  apjDlied 
exclusively  to  the  fund  of  maintenance,  and  some 
other  term,  such  as  "rent  of  labour,"  could  be 
used  to  describe  the  higher  payments,  the  coor- 
dination would  be  complete. 

We  should  then  be  able  to  apply  with  a  fairly 
close  degree  of  accuracy  to  all  three  the  general 
statements  which  have  been  often  reserved  for 
land. 

§  5.  The  fact  that  while  land  may  be  in  exist- 
ence unutilised  below  the  limit  of  cultivation, 
no  forms  of  capital  continuously  exist  below  the 
no-profit  limit,  and  no  labour-power  can  be  assumed 
to  exist  below  the  bare  subsistence  limit,  does  not 
in  the  least  impair  the  setting.  For  just  as  land 
below  the  margin  has  only  a  potential  economic 
existence,  and  can  only  be  brought  into  supply  by 
prices  which  give  a  positive  rent  to  marginal  land 
(lowering  the  margin  of  cultivation),  so  there 
must  be  deemed  to  be  a  potential  fund  of  capital 
which  will  become  actual,  provided  marginal  capi- 
tal receives  a  positive  interest,  while  any  rise  of 
payment  to  the  marginal  15*.  labour  will  increase 


THE  LAW  OF  RENT.  157 

the  supply  of  labour-power,  either  by  raising  the 
population  rate  or  by  improving  the  efficiency  of 
labour,  or  by  both. 

The  causes  which  raise  and  lower  the  margin  in 
all  three  cases  will  be  similar  in  operation.  The 
investigation  of  these  causes,  however,  lies  beyond 
our  present  inquiry.  What  payments  for  use 
of  land,  capital,  labour,  enter  as  elements  into 
market-price  of  goods  ?  was  our  leading  question. 
The  coordination  of  land,  capital,  and  labour 
leads  us  to  conclude  that  just  as  rent  of  land 
need  not  form  an  element  of  cost  or  price  in  agri- 
cultural produce,  some  of  which  is  raised  on  no- 
rent  land,  so  interest  need  not  figure  in  the  cost 
or  price  of  manufactured  goods,  some  of  which  are 
produced  by  no-interest  businesses,  while  similarly 
no  cost  of  labour  above  the  15s.  depreciation  fund 
need  enter  into  the  price  of  commodities  partly 
produced  by  marginal  labourers. 

The  same  reasoning  which  shows  that  differen- 
tial rents  of  land  need  not  enter  price  shows  also 
that  differential  payments  for  capital  and  labour 
need  not  enter  price. 

§  6.  Can  a  market-price  then  be  composed  of 
these  depreciation  or  maintenance  costs,  without 
any  element  of  positive  rent  or  interest  ? 

It  might  be  the  case.  If  a  part  of  the  supply 
of  wheat  in  a  market  was  raised  upon  no-rent  land 
by  farmers  who  obtained  no  interest  for  their  capi- 
tal and  paid  the  minimum  subsistence  Avage  to 


158       THE  ECONOMICS   OF  DISTRIBUTION. 

their  labourers,  such  wheat  raised  under  the  great- 
est economic  difficulty  might  regulate  the  market- 
price.^ 

But  normally  the  last  and  most  expensive  por- 
tion of  supply  which  rules  the  supply-price  will 
not  be  produced  under  conditions  which  exclude 
all  rent  and  all  profit.  Where  a  number  of  farmers 
working  under  widely  different  conditions,  some 
in  old,  some  in  new  countries,  are  contributing  to 
the  same  wheat  supply,  it  is  more  likely  that  the 
last  portion  of  supply  will  be  produced,  partly  on 
no-rent  land,  but  paying  an  interest  on  capital  and 
perhaps  a  wage  far  above  15s.,  partly  by  tenant- 
farmers  paying  rent  but  earning  no  interest  on 
invested  capital,  partly  by  peasants  paying  rent 
or  mortgage  interest,  but  living  on  a  bare  sub- 
sistence wage.  That  is  to  say,  the  Law  of  Sub- 
stitution has  always  to  be  taken  into  account. 
The  possibility  of  this  choice  or  substitution  of 
metliod  shows  the  futility  of  arguments  based  on 
the  single  Ricardian  application  of  the  Law  of 
Rent.  If  the  history  of  the  most  expensive  por- 
tion of  a  wheat  supply  could  be  closely  traced,  it 
might  well  be  found  that  some  quarters  of  it  were 
raised  on  no-rent  land,  others  on  no-profit  capital, 
others  on  subsistence  wages ;  but  that  an  average 

1  This  assumes  that  the  marginal  buyer  is  stronger  than  the 
marginal  seller  in  the  wheat  market,  and  that  therefore  the 
price  is  pressed  down  to  the  lower  limit  so  as  to  include  no 
clement  of  "forced  gaui." 


THE  LAW  OF  RENT.  159 

quarter  of  this  most  expensive  portion  contained 
some  element  of  rent  or  interest  or  higher  wage, 
or  all  three. 

In  other  words,  the  Law  of  Substitution  requires 
that  in  measurement  of  price  we  should  substitute 
for  the  margin  of  cultivation  of  land  a  composite 
margin  of  employment  of  land,  capital,  and  labour, 
at  which  is  paid  not  necessarily  the  minimum 
rent,  interest,  and  wage,  but  the  lowest  average 
combination  of  the  three.  Supply-price  will  be 
composed  (under  absolutely  free  competition)  of 
these  marginal  expenses. 

Differential  expenses  of  production  above  this 
composite  limit,  whether  they  be  rent,  interest,  or 
wages,  will  not  enter  into  the  market-price  of  the 
supply. 


CHAPTER  V. 

THE  GRADING  OP  LABOUR  AND  CAPITAL.     MARGI- 
NAL AND  DIFFERENTIAL  PAYMENTS. 

Paet  I. 

§  1.  Having  indicated  the  changes  in  economic 
conceptions  and  terminology  requisite  to  enable 
us  to  establish  the  general  coordination  of  the 
three  factors  of  production  and  the  application 
in  each  case  of  the  idea  of  a  measurement  of  price 
from  a  no-pay  margin  of  cultivation  or  employ- 
ment, we  may  proceed  to  investigate  with  more 
particularity  how  far  the  marginal  and  differential 
grading  admitted  in  the  case  of  land  is  applicable 
to  the  other  requisites,  and  how  far  the  laws 
which  govern  the  increase  in  supply  of  land  for 
various  markets  operate  in  analogous  fashion  upon 
the  supply  of  labour  and  capital. 

First,  let  us  take  labour.  How  far  can  we 
apply  to  labour  the  system  of  grading  which  we 
have  employed  in  the  case  of  land  ? 

The  tendency  of  earlier  economists,  motived  by 
theoretic  considerations,  was  to  impute  too  much 
fluidity  to  labour,  too  much  choice  of  occupation 
to    individual    labourers,   and   (as  an    oft-quoted 

160 


GRADING  OF  LABOUR  AND  CAPITAL.      161 

passage  of  Adam  Smith  illustrates)  to  make  in- 
suificieut  allowance  for  differences  of  natural 
aptitude  between  man  and  man.  The  early  theo- 
rists spoke  too  much  of  the  labour-market,  as 
if  to  all  intents  and  purposes  it  were  one  market, 
as  if  each  new-grown  labourer  had  the  whole  field 
of  employment  open  to  his  choice,  as  if  the  removal 
of  certain  legal  barriers,  such  as  the  Law  of  Settle- 
ment or  gild  regulations,  would  enable  labour, 
already  specialised  in  some  occupation,  to  leave 
that  occupation  easily  and  freely  and  seek  another, 
where  the  waafes  or  net  advantasfes  were  higher. 
They  failed  to  give  adequate  recognition  to  the 
fact  that  there  exists  not  one  but  many  labour- 
markets,  marked  off  from  one  another  not  merely 
and  not  chiefly  by  locality,  but  by  many  racial, 
educational,  industrial,  and  social  demarcations. 
Between  many  of  these  labour-markets,  even  in 
England  to-day,  the  passage  is  so  narrow  and  so 
slow  that  there  can  hardly  be  said  to  exist  an 
effective  tendency  to  equalise  the  net  advantages 
of  the  various  employments.  The  wide  differences 
of  class  wages,  and  even  of  local  wages,  for  similar 
work,  is  ample  testimony  to  this  truth. 

How  far  the  causes  which  prevent  the  forces 
making  for  equalisation  of  the  net  advantages  of 
labour  from  being  fully  operative  are  to  be  spoken 
of  as  "natural,"  in  the  same  sense  that  the  laws 
which  determine  the  contribution  of  land  to  dif- 
ferent supplies  are  natural,  we  need  not  here  dis- 


162        THE  ECONOMICS   OF  DISTRIBUTION. 

CUSS.  What  does  concern  us  is  the  fact  that,  as  a 
given  kind  of  hxnd  in  a  given  position  is,  partly 
from  natural,  partly  from  social-economic  causes, 
confined  to  contributing  toward  a  particular  sup- 
ply, so  a  given  kind  of  labourer  is  by  natural  and 
social-economic  circumstances  similarly  limited 
in  the  application  of  his  labour-power.  It  may  be 
and  is  easier  to  alter  some  of  the  circumstances 
which  determine  the  application  of  labour  than  in 
the  case  of  land,  though  agricultural  science  and 
machinery  of  transport  have  done  much  to  impart 
greater  adaptability  to  land.  But  though  the  free- 
dom and  adaptability  of  labour  be  greater  than  of 
land,  if  we  take  the  existing  supply  of  labour  it 
must  be  regarded  as  subject,  though  in  a  weaker 
degree,  to  a  gradation  similar  to  that  which  we 
trace  in  land. 

§  2.  As  we  have  land  which  is  good  for  nothing 
but  rough  grazing,  the  worst  of  which  yields  a 
merely  nominal  rent,  so  we  have  a  mass  of  low- 
skilled,  low-untrained  labour,  which  earns  in  its 
worst  sorts  a  wage  of  bare  physical  subsistence. 
In  fact,  the  lowest  wage  is  less  than  a  bare  sub- 
sistence wage,  if  by  the  subsistence  of  the  indi- 
vidual Ave  mean  his  maintenance  during  the  full 
span  of  his  natural  life,  or  even  througli  the  whole 
term  of  his  effective  working  life.  Slave-labour, 
under  an  intelligent  profit-monger,  may  require 
provision  to  be  made  for  a  full  working  life,  though 
even  under  slavery  it  may  sometimes  pay  to  use 


GRADING   OF  LABOUR  AND   CAPITAL.      163 

up  a  slave  by  intense  toil  during  a  shorter  period. 
An  effective  system  of  poor  law,  which  guaranteed 
an  adequate  support  to  able-bodied  labour  out  of 
employment,  upon  terms  not  degrading  to  the 
applicants,  might,  by  offering  an  alternative  to 
ordinary  wage-labour,  secure  economic  conditions 
which  would  raise  the  minimum  wage  of  low- 
skilled  labour  to  a  level  of  life  subsistence.  The 
actual  minimum  wage  under  normal  modern  in- 
dustrial conditions  must  be  taken  to  be  such  a 
wage  as  enables  a  worker  to  go  on  working  until 
he  has  provided  through  his  family  a  substitute. 
Of  course  if  there  is  an  increasing  demand  for 
labour  expected  in  the  future,  the  minimum  wage 
must  be  such  as  to  evoke  more  than  one  substitute, 
i.e.  to  call  for  an  increase  of  working  population 
in  this  lowest  grade. 

This  dependence  of  growth  of  working  popu- 
lation upon  wages  is,  of  course,  modified  by  the 
operation  of  poor  laws,  private  charity,  and  pub- 
lic support  of  various  kinds.  It  will  therefore  be 
the  case  that  population  may  grow  at  a  somewhat 
faster  rate  than  would  be  brought  about  by  the 
play  of  wage-forces  alone. ^ 

1  Eai'ly  economists  overstated  the  directness  and  the  exacti- 
tude of  the  influence  of  purely  economic  forces  (wages)  upon 
the  supply  of  labour.  The  tendency  at  present  is  to  under- 
estimate it.  In  particular  it  has  been  isolated  out  that  a  higher 
standard  of  wages  in  a  country  like  England  does  not  cause  a 
corresponding  growth  of  the  labouring  population.  On  this 
point  three  things  may  be  said.     First,  it  is  often  forgotten  that 


164       THE  ECONOMICS  OF  DISTRIBUTION. 

I  have  spoken  of  a  certain  minimum  wage  as 
analogous  to  a  depreciation  or  wear-and-tear  fund 
of  capital.  This  sum,  varying  somewhat,  of 
course,  with  the  various  kinds  of  labour,  as  the 
depreciation  fund  varies  for  different  forms  of 
capital,  I  estimated  at  15s.  In  a  progressive  in- 
dustrial community,  where  an  increase  of  labouring 
population  with  a  sufficient  margin  of  unemployed 
to  be  utilised  in  periods  of  booming  trade  was  re- 
quired, the  minimum  wage,  or  cost  of  subsistence, 
must  of  course  be  more  than  this  15s.  required  to 
keep  a  stable  population  in  that  grade ;  and  this 
additional  wage  (say  3s.)  required  to  raise  the 
population  must  be  regarded  as  analogous  to  a 
minimum  interest  required  to  call  forth  additional 
capital. 

§  3.  If,  then,  in  a  community  the  lowest  grade 
of  labour  was  paid  18s.  for  its  least  efficient  mem- 
bers, we  should  find  rising  above  this  grade  various 

one  important  effect  of  a  higher  standard  of  comfort  is  that  a 
larger  proportion  of  children  grow  to  maturity.  Secondly,  with 
a  higher  standard  of  comfort,  the  effective  supply  of  labour  is 
increased,  not  only  by  the  number  of  labourers,  but  also  by 
the  quantity  of  labour-power  each  labourer  represents,  i.e.  the 
average  working  life  is  longer,  and  is  capable  of  yielding  in  a 
given  time  a  larger  quantity  of  efficient  labour-power.  Lastly, 
the  check  which  forethought  and  preventive  methods  have 
placed  upon  the  growth  of  population  in  the  more  intelligent 
classes  plays  yet  a  very  small  part  in  the  labour-mai'kets  of  the 
world. 

It  is  still  true  that  rising  wages  evoke  an  increased  supply  of 
labour-power. 


GRADING   OF  LABOUR  AND   CAPITAL.      165 

other  grades  paid  ii])on  Iiigher  scales.  Speaking 
generally,  we  should  be  able  to  classify  the  workers 
by  a  sort  of  stratilication  beginning  with  the  low- 
skilled  worker  at  the  bottom,  proceeding  through 
several  strata  of  factory  hands,  the  building  trades, 
skilled  mechanics,  into  the  salaried,  professional, 
and  managing  classes.  The  rate  of  payment  will 
be  higher,  as  we  rise,  for  the  least  efficient  labour 
actually  employed  at  the  various  levels.  In  other 
words,  we  should  find  a  number  of  class  minimum 
wages  analogous  to  the  different  specific  marginal 
rents  which  mark  off  the  margin  of  pasture  land, 
wheat  land,  hop  land,  city  lands,  etc.  This  strati- 
fication of  labour  is  now  commonly  admitted, 
though  to  some  economic  thinkers  it  seemed  novel 
when  Cairnes  gave  his  vigorous  indorsement  to 
the  idea.  "  What  we  find  in  effect  is,  not  a  whole 
population  competing  indiscriminately  for  all  oc- 
cupations, but  a  series  of  industrial  layers  super- 
imposed on  one  another,  within  each  of  which  the 
various  candidates  for  employment  possess  a  real 
and  effective  power  of  selection,  while  those  occu- 
pying the  several  strata  are,  for  all  purposes  of 
effective  competition,  practically  isolated  from 
each  other."  1  It  is  not  necessary  to  insist  too 
strictly  upon  this  "practical  isolation."  Indi- 
viduals can  pass  from  one  stratum  to  another; 
new  labour  has  some  considerable  choice.  It  is 
sufficient  to  recognise  that  at  any  given  time  we 
1  The  Slave  Power,  p.  73. 


166       THE  ECONOMICS   OF  DISTRIBUTION. 

do  find  a  gradation  of  labour  with  different  rates 
of  waofe  for  the  least  efificient  members  of  each 
grade.  Again,  within  each  group  will  be  found 
a  number  of  different  qualities  of  labour  earning 
different  rates  of  remuneration.  These,  too,  we 
may  measure  from  the  position  of  "  the  determinant 
labourer  "  of  each  class. 

The  same  correction  of  the  position  assigned  to 
the  "marginal  labourer"  is  required  as  in  the  case 
of  marginal  cultivation  of  land.  In  the  labour- 
market  what  is  really  sold  is  not  labour-time,  but 
units  of  labour-power;  the  determinant  labourer, 
therefore,  need  not  be  the  least  efficient  labourer, 
but  may  be  a  superior  labourer,  who  is  "  determi- 
nant "  in  the  sense  that  he  is  only  just  induced  by 
the  class  wage  paid  to  contribute  to  supply.  The 
least  efficient  labourer  might  have  no  alternative 
employment,  and  might  be  willing,  therefore,  to 
accept  a  lower  wage,  if  he  were  obliged;  but  a 
superior  labourer  of  the  class  might  have  an  alter- 
native employment  so  that  the  wage  must  be  such 
as  to  induce  him  to  apply  his  labour-power  to  this 
use.  It  is  the  economic  position  of  this  "deter- 
minant "  labourer  which  from  tlie  cost  side  helps  to 
determine  the  value  of  a  unit  of  labour-power  and 
so  to  fix  not  merely  the  wage  he  himself  receives, 
but  also  the  wage  of  the  various  other  labourers 
in  his  labour-market,  whose  actual  wages  depend 
upon  the  number  of  units  of  this  labour-power 
they  can  give  out.     Thus   the  efficiency  of  the 


GRADING   OF  LABOUR  AND   CAPITAL.      167 

least  efficient  labourer  in  the  class  has  no  direct 
determining  power  over  the  class  wages,  as  is 
sometimes  suggested;  it  is  the  economic  power  of 
the  "determinant  labourer"  which  fixes  the  pay 
of  the  least  efficient  labourer. 

The  system  of  piece  wages  makes  this  easily  in- 
telligible. The  least  efficient  worker  in  a  trade 
may  be  earning  by  piece  wages  20s.  a  week;  this 
may  be  regarded  as  a  marginal  wage  in  this  class 
of  labour,  differential  wages  of  superior  individual 
skill  rising  above  it.  The  "  determinant "  labourer 
may  be  a  superior  worker  earning  30s.,  10s.  being 
a  wage  of  individual  ability  within  the  class. 
This  labourer  must  receive  30s.  in  order  that  he 
may  do  this  kind  of  work  in  preference  to  some 
other.  He  is  the  final  seller  in  this  labour-market, 
whose  action  determines  on  the  selling  side  the 
price  for  the  whole  market. 

But  though  this  30s.  labourer  may  be  accounted 
the  determinant  labourer,  it  does  not  follow  that 
the  whole  of  the  30s.  is  necessary  to  divert  him 
from  his  alternative  employment.  Just  as  in  our 
grading  of  land  we  found  that  in  addition  to  the 
marginal  and  differential  rents  there  might  be  a 
rent  of  sheer  "scarcity,"  where  demand  pressed 
upon  a  short  supply,  so  here  it  might  be  that  the 
alternative  employment  open  to  the  "  determinant " 
labourer  would  yield  him  a  wage  of  only  27s. ;  but 
although  any  wage  above  27s.  would  secure  his 
contribution  to  the  supply  of  labour  under  inves- 


168       THE  ECONOMICS  OF  DISTRIBUTION. 

tigation,  he  is  able  in  his  capacity  of  determinant 
seller  to  exact  30s.,  including  a  scarcity  wage  of 
3s.,  which  last  sum  corresponds  to  the  forced  gain 
that  accrued  to  the  stronger  member  of  the  final 
pair  of  bargainers  in  our  horse-market. 

The  term  "rent  of  ability,"  frequently  applied 
to  the  higher  wages  earned  by  a  more  competent 
worker,  shows  that  the  analogy  of  classification  of 
land  and  labour  has  made  some  considerable  way. 
The  margin  in  both  cases  is  not  rigid,  but  is  con- 
tinually shifting,  faster,  no  doubt,  in  labour  than 
in  land,  but  the  same  economic  terminology  ap- 
plies. 

§  4.  Moreover,  the  price  of  labour  is  seen  to 
enter  into  the  price  of  commodities  upon  precisely 
similar  terms  to  the  rent  of  land,  when  we  exclude 
the  bare  subsistence  wage,  as  we  exclude  the 
depreciation  fund  for  land  and  capital.  The  15s. 
subsistence  should  rightly  be  regarded  as  a  first 
mortgage  upon  the  product,  along  with  the  corre- 
sponding provision  of  maintenance  for  capital  and 
land. 

Beyond  that  necessary  provision  no  element  of 
true  wage  (or  labour  profit)  enters  into  the  price 
of  the  product  of  the  lowest  labour.  But  the 
minimum  wage  of  a  Lancashire  weaver  (say  21s.) 
will  yield  a  marginal  rent  measured  from  15s., 
amounting  to  6s.  This  marginal  or  "class  "  wage 
will  enter  into  price.  If  a  mason's  minimum  wage 
be  30s.,  the  excess  of  this  sum  over  15s.  willsimi- 


PAYMENTS.  169 

larly  enter  into  price.  But  the  individual  wage 
earned  by  a  more  skilful  weaver  or  mason  will 
form  no  element  in  expenses  of  production,  and 
will  not  enter  into  price.  Modern  economists 
often  admit  that  only  the  wage  of  the  least  efficient 
labour  counts  in  price  of  the  product,  but  not  clearly 
recognising  the  difference  between  the  "determi- 
nant" labourer  and  the  "marginal"  labourer,  they 
are  often  disposed  to  impute  to  the  latter  a  determi- 
nant influence  which  really  belongs  to  the  former. 
All  that  we  have  to  add  is  that  there  are  a  num- 
ber of  different  marginal  labourers  for  different 
labour-markets.  There  are  marginal  rents  of 
labour  (sometimes  containing  also  a  rent  of  scarc- 
ity) which  are  represented  in  "price,"  and  there 
are  differential  rents  which  are  not  represented. 


Paet  II. 

§  5.  How  far  may  capital  be  submitted  to  a 
similar  process  of  marginal  and  differential  grad- 
ing? How  far  can  we  distinguish  different  classes 
of  capital  more  or  less  profitable,  and  individual 
differences  within  a  class  ? 

How  far  does  the  alleged  "  fluidity  of  capital, " 
making  for  a  single  supply  and  a  common  level  of 
remuneration  for  its  services,  impugn  this  theory 
of  stratification? 

We  have  seen  that  this  belief  in  an  equality  of 


170       THE  ECONOMICS   OF  DISTRIBUTION. 

remuneration  for  capital  arises  partly  from  the  fact 
that  capital  is  commonly  reduced  to  terms  of  its 
money- value  —  a  process  which  assumes  equality 
of  remuneration  as  its  starting-point.  When  we 
turn  to  the  actual  forms  of  concrete  capital,  we 
certainly  find  wide  variation  of  remuneration. 
But  can  we  regard  these  differences  as  analogous 
to  the  specific  and  differential  rents  or  earnings  of 
land  and  labour?  It  has  been  necessary  to  select 
the  term  "  interest "  to  describe  the  remuneration 
of  capital,  but  capital  cannot  earn  interest  of  itself 
or  even  in  conjunction  with  land  and  labour. 
Capital,  in  order  to  function  in  industry,  must  be 
handled  by  a  business  man,  and  it  is  always  pos- 
sible to  claim  that  a  part  at  least  of  the  net  gain, 
after  all  other  deductions  commonly  named,  is  due 
to  skill  or  economy  of  handling.^  The  extra  gain 
which  comes  from  handling  a  large  quantity  of 
capital,  as  compared  with  a  small  quantity,  even 
though  this  handling  requires  no  more  skill  or 
effort,  is  commonly  assigned,  not  as  payment  for 
use  of  capital,  but  as  wages  of  management. 

But  though  in  practice  it  is  extremely  difficult, 
perhaps  impossible,  to  sever  this  interest,  or  pure 

1  This  claim  is,  of  course,  not  confined  to  the  remuneration 
of  capital ;  the  productiveness  of  land  and  labour  is  also 
dependent  upon  skilful  liandling,  and  it  is  possible  to  claim 
as  true  earnings  of  management  part  of  the  results  of  in- 
creased productiveness  of  land  and  labour.  In  the  case  of 
labour,  Mr.  Mallock  lias  pressed  this  claim,  asserting  that  high 
wages  really  include  earnings  of  management. 


PAYMENTS.  171 

payment  for  use  of  capital,  from  other  elements, 
an  orderly  scheme  of  economic  theory  requires  us 
to  do  so.  Now  my  suggestion  is  that  if  this  sever- 
ance were  made,  interest  would  certainly  be  shown 
not  to  be  equal  for  the  use  of  all  equal  quantities 
of  capital.  The  different  concrete  shapes,  which 
equal  quantities  of  "saving  "  take,  will  most  likely 
differ  as  widely  in  the  profits  they  obtain  for  their 
owners,  as  one  10-acre  field  differs  in  rent  from 
another  10-acre  field,  or  one  labourer  differs  from 
another  labourer  in  wages. 

There  is  no  force  in  operation  which  would 
guarantee  that  the  saving  which  went  into  a 
steam-engine  would  earn  for  its  owner  an  "  in- 
terest" identical  in  size  with  that  for  the  same 
quantity  of  saving  which  went  into  a  shop-build- 
ing, or  that  one  railway  carriage  is  as  remunerative 
as  another  railway  carriage  of  equal  quality. 

In  other  words,  some  employments  of  capital 
are  more  remunerative  than  others,  and,  within  a 
given  employment,  some  pieces  of  capital  are  more 
remunerative  than  others. 

If  these  differences  were  due  to  the  difference 
of  skill  with  Avhich  they  were  handled,  they  must 
of  course  not  be  reckoned  as  differences  of  interest 
in  our  sense. 

But  if  there  exist  certain  conditions  which  pre- 
vent absolute  fluidity  of  investment,  which  limit 
and  mark  off  certain  fields  of  investment  for  cer- 
tain owners  of  capital,  and  which  give  within  a 


172       THE  ECONOMICS   OF  DISTRIBUTION. 

field  of  investment  special  advantages  to  some 
owners  as  compared  to  others,  it  will  seem  legiti- 
mate to  grade  capital,  as  we  grade  land  and  labour, 
into  a  number  of  practically  non-competing  groups 
with  differential  gains  within  each  group. 

§  6.  If  it  were  open  to  all  savers  to  have  full, 
equal  knowledge  of  every  field  of  investment,  and 
to  have  equal  access  to  all  fields,  real  interest,  like 
money  interest,  would  be  uniform.  But  is  this 
the  case? 

General  Walker  has  explicitly  denied  the  alle- 
gation that  different  classes  of  investment  differ 
in  the  rates  of  profit  they  yield,  and  even  suggests 
that  the  differences  of  "interests"  derived  from 
different  pieces  of  capital  in  the  same  class  are  not 
true  interest. 

"That  different  bodies  of  capital  do,  in  fact, 
yield  different  rates  of  interest  is  too  evident  to 
require  proof;  but  this  is  due  to  many  causes, 
wliich  are  irrespective  of  the  nature  of  the  capital 
itself."! 

General  Walker  enumerates  thi'ee  chief  causes 
for  these  differing  rates  of  remuneration :  (a)  Dif- 
ference in  risk;  (/3)  miscalculation  on  the  one 
hand,  or  fortunate  speculation  on  the  other; 
(7)  disguised  rent,  disguised  profits,  or  commer- 
cial good- will. 

Now,  in  the  first  place,  it  may  be  observed  that 
a  and  fS  are  not  different  causes,  but  two  ways  of 
1  Quarterly  Journal  of  Economics,  July,  1891. 


PAYMENTS.  173 

looking  at  the  same  cause.  A  "risky"  invest- 
ment is  nothing  else  than  an  investment  prone  to 
"miscalculation,"  or  in  which  success  is  in  large 
measure  the  result  of  fortunate  speculation ;  a  is 
the  objective,  /8  the  subjective,  view  of  the  same 
factor. 

But  does  this  fact  meet  the  allegation  that 
different  classes  of  investment  differ  in  remunera- 
tiveness?  Not  at  all.  It  only  helps  to  explain 
why,  within  the  same  class  of  investment,  the  rate 
of  interest  upon  some  pieces  of  capital  is  higher 
than  for  others.  The  allegation  that  the  nature 
of  the  capital  has  something  to  do  with  determin- 
ing the  rate  of  interest  means,  of  course,  that  in 
certain  emplo3anents  of  capital  there  is  a  higher 
average  rate  of  interest  than  in  others.  It  is  cer- 
tainly strange  that  General  Walker  should  have 
failed  to  perceive  that  while  his  last  cause  (7) 
refers  to  classes  of  investment,  (a)  and  (/3)  refer 
only  to  individual  investments  within  a  class. 

Turning  to  (7)  it  will  be  at  once  admitted  that 
disguised  rent  is  a  vera  causa  in  determining  what 
seems  to  be  the  higher  interest  for  certain  classes 
of  investment.  There  are  several  ways  in  which 
rent  is  liable  to  figure  as  interest. 

Certain  classes  of  business  yield  a  higher  rate 
of  interest  because  the  capital  invested  in  them  is 
protected  from  free  and  effective  competition  by 
association  with  monopoly  of  land.  Land-values 
and  capital-values  are  not  always  clearly  distiu- 


174       THE  ECONOMICS   OF  DISTRIBUTION. 

guishable.  If  the  term  "capital"  is  confined  to 
its  only  logical  use,  to  express  production-goods 
and  plant,  we  shall  see  that  those  engaged  in  the 
early  steps  of  converting  the  raw  material  of  the 
soil  into  early  forms  of  capital  are,  in  part  land- 
owners, in  part  capitalists.  The  businesses  of  ex- 
tracting ore,  of  raising  cattle,  and  the  whole 
industry  of  agriculture  are  businesses  in  which 
land-values  are  not  easily  distinguishable  from 
capital-values  or  rent  from  interest.  Even  where 
these  operations  are  conducted  on  rented  lands, 
the  custom  of  leasing  does  not  enable  us  to  clearly 
or  precisely  determine  whether  in  a  given  year 
some  profit  has  not  been  returned  as  economic 
rent  and  vice  versa. 

Where  the  owners  of  a  business  are  also  the 
owners  of  ground  upon  which  it  is  conducted,  a 
growing  element  of  land-value  will  often  show 
itself  as  a  rise  in  interest.  No  consideration  of 
the  value  of  surrounding  land  can  wholly  guard 
against  this  confusion.  If  this  is  the  case  in 
ordinary  businesses,  where  the  use  of  land  is  for 
machinery  and  other  plant,  warehouses,  etc.,  much 
more  is  it  the  case  where  the  elements  of  the  soil 
or  spatial  qualities  play  a  direct  part  in  the  busi- 
ness. Such  a  case  is  that  of  breweries.  The 
interest  paid  on  capital  engaged  in  gas  or  water- 
works, or  tramcars,  is  complicated,  as  we  shall  see 
presently,  by  another  monopoly  influence;  but  it 
is  rarely  possible   to  separate,   in  the  dividends 


PAYMENTS.  175 

paid  to  shareholders,  the  elements  of  economic 
rent  and  interest.  Most  important  is  the  part 
placed  by  land  limitation  in  transport  industries. 
Professor  Marshall  is  of  opinion  that  "the  domi- 
nant economic  fact  of  our  age  is  the  development, 
not  of  the  manufacturing,  but  of  the  transport 
industries."^  Now  the  transport  industries,  so 
far  as  they  are  left  in  private  hands,  require  a 
monopoly  of  earth  surface.  Between  au}^  two 
points  of  population  there  is  only  one  shortest 
way.  Whether  it  be  a  railroad,  a  telegraph  road, 
or  a  tram  line,  the  most  advantageous  route  can 
only  be  in  the  possession  of  one  company  at  the 
same  time.  Most  transport  companies  obtain  a 
more  or  less  permanent  possession  of  the  most 
advantageous  route,  supporting  this  natural  mo- 
nopoly, in  many  cases,  by  a  state  privilege  pro- 
tecting them  against  competition,  even  beyond  the 
limits  of  their  natural  monopoly.  Here,  again, 
it  is  impossible  to  sa}^  how  far  the  higher  rate  of 
interest  paid  by  a  successful  railway  or  tramcar 
company  is  really  an  economic  rent  of  land,  and 
how  far  land  monopoly  has  assisted  certain  other 
monopoly  powers  inherent  in  certain  uses  of 
capital. 

If  it  be  the  case  that  more  and  more  capital  and 
labour  will  be  engaged  in  distributive  than   in 
extractive  or  manufacturing  processes,  the  impor- 
tance of  this  close  alliance  of  land  ownership  with 
1  Frinciples  of  Economics,  2d  ed.,  p.  724. 


176       THE  ECONOMICS  OF  DISTRIBUTION. 

capitalism  is  a  growing  one.  Where  the  effect 
of  land  ownership  is  to  restrict  the  competition  of 
capital  in  any  given  employment,  it  may  fairly  be 
urged  that  any  abnormal  interest  due  to  the  re- 
stricted competition  or  the  power  of  capital  is 
ultimately  traceable  to  land-power.  But  inasmuch 
as  this  "specific  rent"  appears  as  interest  and 
cannot  conveniently  be  separated  from  genuine 
interest,  it  is  rightly  regarded  as  an  element  in 
the  specific  differences  of  forms  of  investment. 

By  "disguised  profits,"  General  Walker  may 
mean  one  of  two  things.  It  may  signify  the 
higher  interest  paid  upon  certain  capital  owing  to 
superior  skill  of  management.  In  this  case  "rent 
of  ability  "  figures  as  interest.  The  skill  of  an 
able  manager  who  is  paid  by  a  fixed  salary  may 
for  a  time  secure  higher  dividends  for  the  share- 
holder, just  as  the  mismanagement  of  an  incom- 
petent manager  may  lower  the  dividends.  But, 
unless  it  can  be  shown  that  a  particular  class  of 
business,  by  its  very  nature,  presents  special 
attractions  to  managing  ability,  this  form  of  dis- 
guised profit  is  an  individual  affair  and  cannot  be 
placed  on  the  same  footing  with  disguised  rent 
as  an  explanation  of  specific  differences  in  re- 
munerativeness  of  capital. 

But  the  term  "  disguised  profits "  may  cover 
a  real  form  of  class  gain.  Certain  classes  of 
investment  are,  in  fact,  restricted  to  capital  in 
the  possession  of  men  who  enjoy  certain  "class" 


PAYMENTS.  177 

advantages  of  position,  education,  or  trade  con- 
nection. It  is  admittedly  difficult  for  a  poor 
man  who  has  saved  a  little  money  to  find  a 
safe  or  remunerative  investment.  The  spread 
of  education  and  improved  methods  of  coopera- 
tion may  effect  some  change,  but  it  is  at  pres- 
ent true  that  capital  invested  by  persons  of  means, 
position,  and  intelligence  is,  on  the  average, 
more  remunerative  than  the  capital  invested  by  the 
poorer  and  more  ignorant.  The  restricted  access 
to  knowledge  and  skill,  where  the  use  of  capital 
requires  special  skill,  secures  for  certain  classes  a 
practical  monopoly  of  certain  forms  of  investment. 
Lawyers  and  bankers,  it  is  generally  held,  possess 
certain  opportunities  of  profitable  investment  not 
open  to  ordinary  persons. 

Any  higher  rate  of  interest  secured  by  capital 
invested  under  these  conditions  may,  of  course, 
be  regarded  as  a  "  marginal  rent "  due  to  special 
advantages  of  education  or  opportunities,  and,  as 
such,  classed  under  the  head  of  profit  rather  than 
of  interest.  The  vagueness  still  attaching  to  the 
word  "profit"  as  an  economic  term  favours  this 
interpretation.  But  if,  on  the  other  hand,  we 
regard  limitation  of  investment  as  a  quality  attach- 
ing to  capital,  the  "  marginal  rent "  of  such  form 
of  capital  may  not  unfairly  be  claimed  as  a  "rent " 
of  capital. 

While  the  restricted  access  to  land  or  oppor- 
tunity serves  to  explain  the  higher  rate  of  real  in- 


178       THE  ECONOMICS   OF  DISTRIBUTION. 

terest  for  capital  in  certain  forms  of  investment, 
there  are  other  causes,  political,  social,  and  eco- 
nomic, which  endow  certain  forms  of  capital  with 
a  remunerativeness  which  is  rightly  regarded  as 
attaching  to  the  nature  of  the  species  of  invest- 
ment. 

First:  privileges  conferred  or  restrictions  im- 
posed by  national  or  local  authority  limit  the 
freedom  of  competition  in  certain  employment  of 
capital,  i.e.  endow  certain  capital  with  a  power 
of  monopoly. 

Sometimes  a  charter  gives  to  a  particular  body 
of  capitalists  an  absolute  monopoly,  with  or  with- 
out restrictions  as  to  maximum  price  of  the 
commodity  they  provide.  No  direct  competition 
touches  the  monopoly  of  gas  or  waterworks  estab- 
lished in  a  town  and  secured  by  charter  for  a  given 
body  of  capitalists.  In  addition  to  the  maximum 
price  and  to  a  maximum  rate  of  interest,  some- 
times imposed  but  commonly  evaded  by  watering 
the  stock  or  other  devices,  there  are  two  economic 
limitations  to  such  monopolies.  The  first  is  that 
furnished  by  the  Law  of  Substitution,  the  ability 
of  the  consumer  to  dispense  with  the  article  of 
monopoly  and  to  use  some  other  article  in  its  stead. 
If  the  price  of  gas  were  raised  beyond  a  certain 
point,  the  enlarged  use  of  electricity,  of  oil,  can- 
dles, or  other  illuminants  would  check  the  rise. 
Hence  the  monopoly  of  a  water  company  is  a 
stronger  one;    for  it  would  Ijc   more   difficult  to 


PAYMENTS.  179 

obtain  another  siippl}'  or  to  substitute  some  other 
commodity  than  in  the  case  of  gas. 

The  second  limit  depends  upon  the  complex 
relations  existing  between  supply-price  and  de- 
mand in  the  particular  case.  Every  rise  in  the 
price  of  gas  above  the  competitive  price  of  two 
rival  companies  would  bring  a  certain  shrinkage 
of  demand.  Hence  it  arises  that  the  highest  price 
does  not  necessarily  yield  the  largest  net  profit. 
Generally,  it  may  be  stated  that  the  most  profit- 
able price  is  high  in  proportion  as  the  article  of 
monopoly  is  indispensable. 

Since  neither  of  these  qualifying  conditions  of 
"monopoly"  is  of  the  nature  of  that  competition 
which  tends  to  reduce  to  a  common  level  ordinary 
classes  of  investment,  we  have  clearly  a  specific 
interest  which  enables  us  to  grade  these  protected 
classes  of  investment  according  to  the  various 
degrees  of  monopoly  pressure  which  they  possess. 

The  power  vested  in  owners  of  valuable  patents, 
and  even  in  those  who,  without  legal  protection, 
have  exclusive  control  of  any  market  or  of  the  sale 
of  any  class  of  goods,  is  of  a  similar  economic 
character,  and  enables  the  capital  invested  in  such 
businesses  to  get  a  specific  interest. 

Protective  tariffs,  or  bounties,  in  so  far  as  they 
succeed  in  restricting  or  limiting  freedom  of  com- 
petition in  certain  employments  of  capital,  help 
to  maintain  a  special  rate  of  interest  in  those 
businesses    in  which   new  capital   cannot   easily 


180       THE  ECONOMICS   OF  DISTRIBUTION. 

enter  so  as  to  share  the  advantage  of  the  state- 
granted  monopoly.  The  only  economic  reason 
which  can  induce  any  class  of  manufacturers  to 
seek  protection  for  the  goods  they  make,  is  the 
desire  to  reap  the  marginal  interest  of  capital 
which  this  protection  secures. 

But  the  most  important  cause  of  marginal  rents 
(specific  interests)  of  capital  resides  in  the  nature 
of  capital  itself  as  a  factor  of  production  in  cer- 
tain classes  of  business,  independently  of  all 
social  or  political  privileges  or  restrictions. 

In  whatever  branches  of  industry  the  economic 
Law  of  Increasing  Returns  prevails,  that  is  to  say, 
where  capital  and  labour  are  most  advantageously 
employed  in  large  quantities,  the  capital  invested 
may  obtain  a  special  rate  of  interest.  It  is  un- 
necessary to  enumerate  the  particular  economies 
which  in  most  manufacturing  and  mercantile  busi- 
nesses give  a  net  economic  advantage  to  the  big 
capital.  But  it  should  be  kept  in  mind  that  these 
economies  do  not  of  themselves  furnish  any  guar- 
antee of  a  higher  rate  of  interest.  They  operate 
indirectly,  by  reducing  the  number  of  competitors 
and  abating  the  pressure  of  competition.  If  the 
competition  between  the  smaller  number  of  large 
capitals  was  as  keen  and  constant  as  between  the 
larger  number  of  small  capitals  invested  in  other 
businesses,  the  advantage  in  higher  interest  which 
these  economies  might  seem  to  justify  would 
entirely  disappear.     But  the  size  of  the  capitals 


PA  YMENT8.  181 

engaged  prevents  the  competition  from  being  so 
keen  and  so  constant.  At  certain  periods,  it  is 
true,  competition  may  be  as  effective  between  two 
or  three  competitors  as  between  two  or  three 
thousand.  But  where  the  competition  is  between 
few,  it  is,  on  the  average,  less  persistently  effec- 
tive. The  different  competitors  exercise  each  a 
certain  practical  monopoly  over  certain  districts 
or  in  certain  lines  of  goods.  Even  where  the  com- 
petition with  a  big  competitor  is  keen,  its  keen- 
ness is  abated  when  prices  are  driven  down  so  low 
as  to  yield  only  a  common  rate  of  interest.  Above 
all,  the  opportunities  of  suspending  competition, 
or  of  forming  agreements  for  maintaining  prices, 
limiting  supply,  or  keeping  down  wages,  are 
vastly  greater  in  a  trade  given  over  to  a  few  large 
capitals  than  where  there  are  many  small  compet- 
ing capitals.  The  advantage  given  to  capital  in 
controlling  the  price  of  labour  in  employments 
most  subject  to  the  Law  of  Increasing  Returns, 
where  a  small  number  of  large  capitals  is  con- 
stantly narrowing  to  the  apex  of  a  Trust,  is  most 
significant.  Certain  disadvantages  common  to 
most  forms  of  labour  in  bargaining  with  capital 
are  greatly  enhanced  where  the  competition  of 
capitals  is  restricted  to  a  few  large  masters. 
"Labour,"  writes  Professor  Marshall,  "is  often 
sold  under  special  disadvantages,  arising  from  the 
closely  connected  group  of  facts,  that  labour-power 
is  'perishable,'  that  the  sellers  of  it  are  commonly 


182       THE  ECONOMICS   OF  DISTRIBUTION. 

poor  and  have  no  reserve  fund,  and  that  they  can- 
not easily  withhold  it  from  the  market. "  ^  A  posi- 
tion of  vantage  in  bargaining  with  labour  is  one 
of  the  chief  economic  advantages  in  those  indus- 
tries where  the  action  of  the  Law  of  Increasing 
Returns  has  thrown  the  business  into  the  hands 
of  a  few  large  firms. 

The  net  economic  advantages  which  large  capi- 
tals enjoy  in  industries  where  the  Law  of  Increas- 
ing Returns  is  more  powerfully  operative  than  the 
Law  of  Diminishing  Returns,  secure  to  those  capi- 
tals a  position  of  limited  monopoly,  i.e.  a  monopoly 
limited  by  the  consideration  that  a  very  high  price 
would  bring  new  competitors  into  the  market. 
The  gain  which  this  limited  monopoly  secures  is 
a  "specific  marginal  interest."  Industries  where 
the  monopoly  is  very  limited  draw  a  small  specific 
interest;  industries  where  the  monopoly  is  of  a 
prime  necessary  of  life,  a  substitute  for  which 
cannot  easily  be  found,  where  a  supply  from  a 
more  distant  market  cannot  easily  be  procured, 
where  new  captial  cannot  easily  be  applied  to  the 
industry,  and  where  a  considerable  reduction  of 
consumption  is  impossible,  are  in  a  position  to 
derive  a  very  high  marginal  interest.  The  Law 
of  Increasing  Returns  forms  the  basis  of  economic 
grading  of  capital,  just  as  the  Law  of  Diminishing 
Returns  forms  the  basis  of  grading  in  land-values. 
According-  to  the  varying  pressure  of  this  law  in 
1  Principles  of  Economics,  Vol.  I,  p.  600  (2d  ed.). 


PA  YMENTS.  183 

different  industries,  the  capital  engaged  therein 
enjoys  a  greater  or  less  cfegree  of  monopoly  power 
and  draws  a  greater  or  less  specific  interest,  in 
addition  to  the  minimum  interest  socially  required 
to  induce  the  "saving"  of  capital.  Where  the 
economies  of  large-scale  production  are  biggest, 
the  tendency  is  to  bring  about  an  absolute  or 
limited  suspension  of  competition  among  hitherto 
competing  capitals  and  to  secure  the  "saving  of 
friction "  which  attends  the  establishment  of  a 
ring  or  trust,  where  the  present  action  of  com- 
petition is  reduced  to  a  minimum. 

The  monopoly  of  a  strong  trust  differs  only  in 
degree,  and  not  in  kind,  from  the  monopoly  held, 
in  different  proportions,  by  all  large  forms  of  capi- 
tal protected  against  the  competition  of  smaller 
intruders  by  the  advantage  conferred  by  the  opera- 
tion of  the  Law  of  Increasing  Returns.  Of  course 
there  are  doubtless  industries  where  this  Law  of 
Increasing  Returns  ceases  to  be  operative  beyond 
a  certain  point,  or  more  strictly  speaking,  where 
a  decline  in  efficiency  of  management  in  a  business 
of  ever  growing  magnitude  would  outweigh  the 
economies  of  a  larger  capital. ^ 

But  it  is  safe  to  say  that  in  any  industry  within 
the  limits  of  the  dominant  operation  of  this  Law 

1  Professor  Marshall,  who  has  worked  out  the  operation  of 
the  Law  of  Increasing  Returns  and  its  limitations,  considers  its 
operation  from  the  standpoint  of  individual  firms,  not  of  classes 
of  investment.     Bk.  V,  Ch.  XI. 


184       THE  ECONOMICS   OF  DISTRIBUTION. 

of  Increasing  Returns,  there  is  an  element  of  eco- 
nomic monopoly  yielding  a  specific  marginal  rent. 

We  are  now  able  to  recognise  that,  in  economic 
theory  at  any  rate,  pieces  of  capital  may  be  graded, 
just  as  pieces  of  land  may  be  graded,  according  to 
their  capacity  of  contributing  to  various  supplies. 

There  are  several  reasons  which  explain  why 
this  conclusion,  which  seems  to  follow  so  clearly 
from  the  admitted  operation  of  the  Law  of  Increas- 
ing Returns,  should  have  so  generally  escaped 
acknowledgment. 

The  great  variety  in  forms  of  capital,  its  superior 
mobility  as  compared  with  land,  its  more  rapid  and 
intricate  fluctuations  of  value,  have  materially  con- 
tributed to  conceal  the  gradation  of  capital.  More 
important  still  is  the  fact  that,  since  capital  is  meas- 
ured in  terms  of  money,  actual  forms  of  capital 
are  being  continually  revalued  according  to  their 
remunerativeness.  This  "  marginal  rent "  of  mo- 
nopoly is  constantly  absorbed  into  the  higher  valu- 
ation which  is  given  to  the  capital.  The  outside 
investor  of  £100  gets  no  more  interest  by  purchas- 
ing a  share  in  a  business  reaping  a  high  marginal 
rent  than  in  a  business  enjoying  no  such  rent. 

Lastly,  the  confused  and  illogical  connotation 
given  to  the  term  "  capital "  by  most  English  and 
American  economists  has  helped  to  obscure  the 
truth.  1 

1  Professor  Bohm-Bawerk  expresses  a  natural  astonishment 
that  so  many  English  economists,  dilTcring  so  widely  in  their 


PA  Y3IENTS.  185 

But,  in  addition  to  these  causes  which  operate 
to  hide  the  nature  of  capital-values,  there  are 
special  reasons  why  marginal  gains  of  capital  have 
escaped  recognition  among  many  who  have  clearly 
grasped  the  conception  of  scarcity-value  in  land 
and  in  natural  ability. 

First,  there  is  the  difficulty,  to  which  attention 
has  been  already  called,  of  accurately  distinguish- 
ing interest  of  capital  from  other  special  gains 
with  which  it  coalesces.  The  interests  of  capital 
drawn  by  the  firms  of  Bass  or  Guinness  are  not 
separable  from  the  gains  arising  from  certain  forms 
of  land  and  water  monopoly  which  form  part  of 
the  business  "capital"  of  these  companies.  It  is 
not  possible  to  say  precisely  how  much  of  the 
monopoly  rent  which  falls  to  Messrs.  Carnegie  is 
due  to  monopoly  of  land,  how  much  to  the  legal 
protection  of  the  tariff,  and  how  much  to  the 
competitive  advantages  of  a  large  capital  over  a 
small  one  in  the  steel  rail  industry.  The  capital 
invested  in  a  chemist's  shop  probably  yields  a 
higher  average  interest  than  that  employed  in  a 
tobacconist's.  It  is  not  possible  to  say  how  much 
of  this  advantage  is  due  to  the  fact  that  it  is 
cheaper  to  stock  a  tobacconist's  shop  than  a 
chemist's,  and  that  competition  is,  therefore, 
keener  among  the  former,  and  how  much  of  the 

definitions  of  capital,  should  agree  in  the  inconsistency  of 
Including  under  capital  consumption  goods  in  the  possession  of 
labourers.     (^Positive  Theory  of  Capital,  p.  G7.) 


186       THE  ECONOMICS   OF  DISTRIBUTION. 

advantage  should  be  regarded  as  rent  of  ability  or 
as  rent  of  a  legal  monopoly,  because  any  one  may 
purchase  a  license  to  sell  tobacco,  while  certain 
personal  qualifications  are  required  in  a  chemist. 

This  difficulty  involved  in  a  separate  estimate 
of  capital  is  one  of  the  chief  reasons  why  the 
specific  marginal  interests  of  capital  have  escaped 
notice,  and  have  generally  been  attributed  to  land, 
legal  monopoly,  or  natural  ability,  with  the  rents 
of  which  they  often  coalesce. 

Another  reason  why  they  escape  notice  is  that 
they  are  hidden  generally  by  the  greater  promi- 
nence of  individual  rents.  Marginal  rent  is  only 
an  approximately  accurate  term,  selected  for  cer- 
tain purposes  of  convenience.  If  Ave  apply  to 
different  employments  of  capital  the  Law  of  In- 
creasing Returns,  we  see  that  it  acts  with  varying 
force  in  various  employments.  It  thus  gives  rise 
to  a  number  of  marginal  rents  of  capital.  But, 
within  each  species  of  employment,  it  also  applies 
with  varying  force  to  various  sizes  of  business. 

If  any  evidence  were  required  of  the  existence 
of  marginal  and  individual  interest  of  capital,  it 
would  be  afforded  by  the  persistent  attempt  which 
is  constantly  made  by  a  number  of  owners  of  small 
capitals  to  obtain  these  special  gains  by  massing 
their  small  ca[)itals  into  a  single  large  one.  TJiu 
starting  of  new  joint-stock  banks  is  strong  evi- 
dence of  a  belief  in  the  inherent  advantage  of  a 
large  capital  over  a  small.     One  result  of  success- 


PAYMENTS.  187 

ful  cooperation  of  a  number  of  small  capitals,  in 
employments  once  monopolised  by  a  few  rich 
owners  of  large  private  capitals,  is,  of  course,  to 
introduce  that  very  element  of  keen  competition, 
the  absence  of  which  was  the  basis  of  the  monopoly 
rent.  Where  cooperative  small  capitals  can  com- 
pete on  equal  terms  with  large  private  capitals, 
marginal  and  differential  rents  of  capital  alike 
tend  to  disappear.  So  far,  however,  as  it  is  true 
that  a  particular  class  of  business  requires  a  capital 
of  a  given  size  in  order  that  it  may  be  conducted 
with  an  ordinary  chance  of  success,  this  limitation 
is  able  to  secure  a  marginal  rent  for  the  capital 
employed  in  it  with  average  business  ability,  as 
within  that  business  the  advantage  which  a  larger 
capital  has  over  a  smaller  constitutes  a  basis  of 
individual  rent. 

One  further  objection  to  the  proposed  grading 
of  capital  requires  an  answer.  It  will  doubtless 
be  urged  that  the  differences  upon  which  it  is  sug- 
gested capital  should  be  graded  are  not  differences 
inherent  in  the  nature  of  capital,  but  rather  differ- 
ences in  the  conditions  of  its  employment.  The 
answer  is  that  the  conditions  under  which  any 
given  piece  of  capital  are  employed,  the  size  in 
which  it  is  massed,  the  place  it  occupies  in  the 
industrial  machine,  belong  to  the  nature  of  this 
material  qua  capital  just  as  the  element  of  relative 
position  belongs  to  the  nature  of  land- values. 
The  value  of  particular  forms  of  capital,  of  so 


188       THE  ECONOMICS  OF  DISTRIBUTION. 

manj'^  engines,  or  pianos,  or  sovereigns,  depends 
in  large  measure  upon  ^A'^here  they  are  situated, 
and  in  what  quantities  they  are  collected ;  accord- 
ing as  they  are  more  or  less  advantageously  situ- 
ated in  these  respects,  they  help  to  earn  a  higher 
or  lower  specific  interest. 

The  other  form  this  same  objection  takes,  that 
capital  is  inseparable  from  the  guiding  mind  of 
its  employer,  and  that  differences  in  rates  of  re- 
muneration are  entirely  attributable  to  skill  or 
good  fortune  of  the  entrepreneur^  needs  no  further 
discussion.  It  has  been  already  admitted  that  an 
element  of  disguised  profit  is  liable  to  figure  as 
interest,  just  as  it  may  also  figure  as  rent  of  land 
when  a  rapacious  landlord  rack-rents  the  tenant  of 
a  well-conducted  shop.  The  intelligent  activity 
of  man  is  requisite  to  the  employment  of  capital 
just  as  it  is  to  the  employment  of  land  and  labour- 
power,  if  they  are  to  be  put  to  serviceable  use 
so  as  to  yield  a  return  in  value.  But  the  skill  of 
management  is  no  more  the  cause  of  the  rents  of 
capital  which  we  are  tracing  than  of  the  specific 
rents  of  land. 

In  reckoning  capital-values  just  as  in  reckon- 
ing land-values,  we  are  entitled  to  assume  that 
average  human  intelligence  is  at  work  in  their 
employment.  It  is  important  to  keep  this  in 
mind,  for  it  furnishes  a  complete  refutation  to 
a  view  which  is  often  held  respecting  the  high 
rates  of  interest  in  certain  classes  of  investments. 


PAYMENTS.  189 

Where  successful  firms  obtain  very  high  interest, 
it  is  alleged  that  these  high  returns  are  balanced 
by  the  low-interest,  or  the  no-interest,  or  the 
minus-interest,  i.e.  failure,  of  less  successful  firms. 
In  kinds  of  employment  of  capital  where  the  prizes 
are  high  the  blanks  are  more  numerous. 

Now  it  is  only  natural  that  the  high  monopoly 
rents  obtained  by  successful  firms  should  tempt 
foolish  owners  of  capital  to  engage  in  rash  specu- 
lation with  the  view  of  sharing  these  monopoly 
rents.  But,  in  reckoning  the  specific  rent  or  the 
total  interest  of  capital  employed  in  such  an  in- 
dustry as  gold-mining,  we  have  no  right  to  count 
in  the  sums  which  greenhorns  hand  over  to  the 
floaters  of  bogus  companies.  We  do  not  assess 
good  agricultural  land  at  a  minus  rent  because 
many  a  fool  has  squandered  his  money  in  bad 
farming.  The  specific  rent  of  a  given  class  of 
land  is  what  it  will  pay  in  the  hands  of  a  tenant 
of  average  skill ;  so  the  specific  rent  of  gold-mining 
or  any  other  form  of  investment  presupposes  the  ap- 
plication of  ordinary  business  intelligence.  When 
this  is  borne  in  mind,  it  will  be  seen  that  the  rates 
of  interest,  set  down  in  statistical  reports  of  the 
conditions  of  railways,  banking,  mining,  and  other 
industries,  generally  conceal  a  portion  or  the  whole 
of  the  specific  rent,  by  including  in  the  capital 
whose  interest  is  averaged  a  great  deal  of  capital 
not  applied  under  the  above-named  condition.  If 
we  are  to  exclude,  as  is  admittedly  right,  the  ele- 


190       THE  ECONOMICS   OF  DISTRIBUTION. 

ment  of  disguised  profit,  due  to  special  skill  of 
management,  we  must  also  exclude  the  element 
of  disguised  loss,  due  to  the  folly  of  ignorant  in- 
vestors and  incompetency  of  management. 

§  7.  The  greater  facility  of  transferring  forms 
of  capital  from  place  to  place,  the  fact  that  a  large 
projDortion  even  of  "  fixed  "  capital  can  be  trans- 
ferred, though  at  a  loss,  from  one  employment  to 
another,  the  large  field  of  choice  which  an  average 
saver  has  for  the  storage  of  his  saving  power  in 
forms  of  capital, —  these  and  other  considerations 
perhaps  impart  a  larger  fluidity  and  freedom  of 
competition  to  capital  than  to  land,  or  even  than 
to  labour. 

But  none  the  less,  the  idea  of  practically 
non-competing  groups  with  differential  positions 
within  each  group  seems  conveniently  applicable 
to  the  supply  of  all  three  factors  of  production. 
In  none  of  the  three  cases  must  we  regard  the 
specific  and  individual  status  as  a  rigid  one ;  there 
is  a  constant  shifting  of  marginal  and  differential 
values.  But  at  any  given  time  only  a  certain 
quantity  of  land,  of  capital,  of  labour,  is  avail- 
able for  contribution  to  a  class  of  supply:  the 
worst  of  this  land  may  pay  a  rent,  and  this  rent 
will  enter  into  price;  the  worst  of  the 'labour  may 
earn  a  class  wage  above  the  unskilled  labour- 
ers, this  wage  will  enter  into  price;  the  least 
favourably  situated  mill  or  mine  contributing  to 
the  supply  may  be  able  to  earn  an  interest  above 


\ 

PAYMENTS.  lOl 

the  minimum,  this  interest  will  enter  into 
price. 

The  individual  superiorities  enjoyed  by  special 
pieces  of  land,  labour,  capital,  though  they  pro- 
cure for  their  owners  special  rates  of  rent,  wages, 
and  interest,  will  not  enter  into  price. 

Following  this  analysis,  if  we  took  the  market- 
price  of  a  supply  of  finished  manufactured  goods, 
we  should  find  that  price  representing  a  complex 
of  a  large  variety  of  marginal  money-costs ;  these 
marginal  costs  would  be  the  marginal  rents  of  the 
land,  capital,  and  labour  required  at  each  stage  in 
the  different  processes  of  production.  At  some 
stages  no-rent  land  might  be  used;  at  other  stages 
the  worst  land  in  use  would  be  rented;  at  other 
stages  no-interest  businesses  might  be  competing, 
and  profits  would  not  figure  in  the  costs  at  that 
stage;  in  other  processes  unskilled  labour  at  a 
subsistence  wage  might  be  employed,  and  this 
"  wear  and  tear "  alone  would  cost. 

It  is,  however,  all-essential  to  perceive  the  need 
of  a  close  coordination  of  the  three  factors  of  pro- 
duction. Every  price  must  contain  a  provision 
against  the  wear  and  tear  of  the  land,  capital, 
and  labour  employed  at  each  stage  of  production 
(whatever  that  wear-and-tear  fund  be  called),  and 
it  must  contain  a  variety  of  positive  costs  required 
to  evoke  the  use  of  the  "  marginal "  portion  of  the 
land,  capital,  and  labour  required.  These  costs 
may  be  merely  nominal,  as  where  no-rent  land. 


192       THE  ECONOMICS   OF  DISTRIBUTION. 

no-interest  capital,  no-wage  (15s.)  labour,  be 
used;  or  they  may  be  positive,  where  the  worst 
portion  of  the  land,  capital,  or  labour  in  use 
requires  a  positive  marginal  rent. 


CHAPTER   VI. 

THE  COORDINATION  OF  THE  FACTORS  OF  PRODUC- 
TION. EFFECTS  ON  THE  THEORY  OF  PRICE  AND 
DISTRIBUTION. 

§  1.    The  results  of  our  reasoning  have  been 

(1)  to  coordinate  the  several  factors  of  production 
with  regard  to  the  application  of  a  Law  of  Rent; 

(2)  to  amplify  the  Law  of  Rent  by  distinguishing 
a  number  of  margins  of  employment  with  differen- 
tial rents  measured  from  these  margins,  the  mar- 
ginal rents  entering  into  price,  the  differential 
rents  being  excluded  from  price ;  (3)  to  substitute 
a  composite  margin  for  the  land-margin  in  con- 
sidering the  effects  of  increased  demand  upon 
production. 

Now  this  restatement  and  expanded  application 
of  the  idea  of  rent  throws  important  light  upon 
two  closely  related  matters:  (1)  the  composition 
of  a  price  as  an  amalgam  of  payments  for  the  use 
of  various  factors  of  production ;  (2)  the  theor}^  of 
Distribution  or  of  the  proportion  in  which  price  is 
divided  as  income  among  the  owners  of  factors  of 
production. 

An  increased  demand  for  a  commodity  which, 
193 


194       TUE  ECONOMICS   OF  DISTRIBUTION. 

by  raising  its  price,  stimulates  an  increased  rate 
of  production,  will  in  most  cases  lower  the  margin 
of  employment  of  all  three  factors,  calling  into 
economic  use  inferior  qualities  of  land,  labour, 
and  capital.  The  new  use,  not  only  of  land, 
but  of  labour  and  of  capital,  will,  considered  as 
a  separate  unit,  be  more  expensive  to  buy  than 
the  same  quantity  of  the  old  use,  for  the  same  rent 
which  was  paid  before  for  an  acre  of  marginal  land 
will  now  be  paid  for  an  acre  of  land  below  the 
former  margin;  and,  since  a  larger  number  of 
acres  will  be  required  to  furnish  a  given  quantity 
of  productive  power,  the  price  of  a  unit  of  land- 
use  will  be  greater;  so,  likewise,  an  increased 
number  of  inferior  labourers  must  be  employed  at 
the  same  wages  previously  paid  to  the  marginal 
labourers  formerly  employed,  in  order  to  obtain  a 
given  increment  of  labour-power,  and  a  higher 
price  must  be  paid  for  a  given  quantity  of  use  of 
new  forms  of  capital.  The  case  of  capital  should 
be  clearly  understood.  If  there  are  in  actual  exist- 
ence unused  forms  of  capital,  plant,  machinery, 
etc.,  somewhat  inferior  to  those  in  previous  use, 
these  stand  precisely  in  an  analogous  position  to 
land  whicl)  lies  below  the  margin;  in  order  to  get 
out  of  them  a  given  amount  of  productivity  of  capi- 
tal, a  larger  number  must  be  employed  than  of  the 
superior  forms,  and  the  payment  will  be  the  same 
as  in  the  case  of  these  latter.  This  can  only  be 
done  by  increasing  the  payment  for  the  use  of  each 


TUE  FACTORS   OF  PRODUCTION.  195 

mill,  machine,  or  other  concrete  piece  of  capital, 
which  means  a  rise  of  price  per  unit  of  capital- 
power  and  a  corresponding  raising  of  the  differen- 
tial rent  or  interest  of  the  better  sorts  of  forms 
of  capital  which  were  formerly  in  use.  The  same 
result  occurs  if,  instead  of  bringing  into  use  in- 
ferior existing  forms  of  capital,  it  is  souglit  to 
work  more  fully  existing  forms  of  capital  already 
in  use ;  this  is  analogous  to  an  attempt  to  get  more 
land-power  out  of  a  given  piece  of  land  by  intenser 
cultivation;  in  each  case  the  added  increment  of 
productive  power  is  obtained  at  a  greater  expense, 
which  can  only  be  defrayed  on  condition  that  forces 
of  supply  and  demand  have  raised  the  price  of 
a  unit  of  productive  power.  Similarly,  if  no  un- 
used or  half-used  forms  of  capital  exist,  and  the 
new  use  of  capital  now  required  must  be  supplied 
by  new  savings,  these  new  savings  can  only  be 
brought  into  economic  existence  by  raising  the  rate 
of  interest,  so  that  the  new  forms  of  capital  will 
be  paid  at  a  higher  price  for  their  use  than  the  old 
forms  were  previously  paid. 

§  2.  At  first  sight  this  seems  to  indicate  the 
universal  dominance  of  the  Law  of  Diminishing 
Returns  over  the  whole  field  of  industry.  If 
the  demand  for  an  increased  use  of  each  factor 
calls  into  use  an  inferior  quality  of  the  factor, 
involving  an  increased  exj^ense  for  a  given  quan- 
tity of  each  sort  of  productive  power,  with  every 
increase  of  supply  the  marginal  cost  would  rise. 


196       THE  ECONOMICS  OF  DISTRIBUTION. 

and  the   price   of    the   whole   supply   would    be 
enhanced. 

Indeed,  so  long  as  a  purely  mechanical  character 
is  accorded  to  the  operation  of  productive  forces, 
and  each  new  unit  of  force  is  simply  regarded  as 
an  addition  to  the  old  units,  there  is  no  escape 
from  the  Law  of  Diminishing  Returns.  Why, 
then,  do  we  say  that  the  Law  of  Diminishing 
Returns  dominates  agriculture  and  the  extractive 
industries,  and  enters  manufactures  and  other  in- 
dustries only  in  proportion  as  raw  materials  and 
productive  powers  of  nature  are  expenses  of  pro- 
duction ?  Why  do  we  trace  a  Law  of  Increasing 
Returns  in  many  industries  ? 

The  explanation  is  this.  When  the  margin  of 
cultivation  for  land  is  lowered  and  inferior  lands 
are  brought  into  use,  the  addition  of  the  new  in- 
crements of  land-use  has  no  power  to  raise  the 
productiveness  of  the  earlier  increments  of  land- 
use  ;  no  doubt  the  same  causes  which  have  lowered 
the  margin  of  cultivation  have  raised  the  price  of 
the  productivity  of  the  better  lands,  but  they  have 
not  made  them  absolutely  more  productive;  the 
different  portions  of  land  stand  in  no  strong  or- 
ganic relation,  so  that  what  happens  to  one  piece 
will  affect  the  productivity  of  other  pieces.  To  a 
certain  extent  it  is  true  that  the  enlargement  of  a 
farm  by  taking  on  inferior  outlying  land  might 
enable  the  farm  to  be  more  self-sustaining,  by 
promoting  a  more  advantageous  division  of  uses 


THE  FACTORS  OF  PRODUCTION.  197 

in  the  other  land,  the  new  inferior  land  perhaps 
furnishing  certain  necessary  accommodation  which 
would  set  free  a  better  piece  of  land  for  a  more 
profitable  use.  But  in  every  country  for  most 
sorts  of  farming  there  are  well-recognised  limits 
of  size,  and  any  further  taking  in  of  land  beyond 
the  economic  limit  will  not  recoup  the  farmer  for 
the  inferiority  of  the  new  land  by  any  sufficient 
gain  in  the  arrangement  of  his  operations. 

The  economies  of  division  of  labour  which  often 
attend  large  farming  as  compared  with  small  farm- 
ing cannot  of  course  be  imputed  to  an  increased 
productivity  of  land-use,  as  they  are  not  attained 
by  a  mere  addition  of  new  increments  of  land. 

Since  the  new  units  of  inferior  land-use,  ob- 
tained by  lowering  the  margin  of  cultivation,  have 
no  considerable  or  corresponding  influence  in  rais- 
ing the  productivity  of  other  productive  force 
resident  in  other  portions  of  land,  we  obtain  a 
diminishing  return  from  a  given  quantity  of 
labour  applied  to  agriculture  where  inferior  lands 
are  called  into  use.^ 

§  3.  With  labour  it  is  different.  Though,  if 
we  treat  the  new  increment  of  labour-power  as  a 
thing  apart,  it  seems  to  give  a  diminishing  return, 
that  diminution  may  be  more  than  compensated 

1  When  agriculture  has  become  chiefly  a  capitalist  rather 
than  a  land  enterprise,  it  may  sometimes  confoi'm  to  a  Law 
of  Increasing  Returns,  as  possibly  in  some  forms  of  bonanza 
farming. 


198       THE  ECONOMICS   OF  DISTRIBUTION. 

by  its  influence  upon  the  aggregate  of  labour-power 
with  which  it  is  cooperating.  We  have  here  to 
consider  a  close  organic  structure  of  industry,  so 
that  a  lowering  of  the  margin  of  employment  of 
labour  may  be  followed  by  such  improved  efficiency 
of  the  whole  cooperative  mass  of  labour-power  as 
shall  enable  the  increased  aggregate  of  supply  of 
commodities  to  be  produced  less  expensively  in 
terms  of  labour-use  than  the  former  smaller 
aggregate. 

This  is  no  more  than  to  say  that  the  Law  of 
Diminishing  Eeturns  is  a  law  of  matter,  the  Law 
of  Increasing  Returns  a  law  of  mind.  Just  in 
proportion  as  labour-power  is  low-skilled  and 
physical,  its  efficiency  depends  less  upon  intelli- 
gent cooperation  and  is  less  amenable  to  speciali- 
sation. A  lowering  of  the  standard  of  employment 
in  navvy  labour  or  in  the  labour  of  fruit-pickers 
may  easily  show  that  the  industry  conforms  to  the 
Law  of  Diminishing  Returns,  i.e.  that  the  infe- 
riority of  labour  at  the  same  pay  is  not  compensated 
by  improved  division  of  labour  or  other  organic 
economies  of  the  particular  business.  It  is  just 
in  proportion  as  we  rise  to  those  grades  of  labour 
in  which  physical  power  plays  a  relatively  unim- 
portant part,  that  we  realise  the  operation  of  the 
Law  of  Increasing  Returns. 

It  is  the  inelasticity,  the  inorganic  cliaracter  of 
the  productive  powers  of  nature,  whi(^li  Ricardo 
signified  by  applying  the  epithets  "  inherent  and 


TUB  FACTORS   OF  PRODUCTION.  199 

indestructible,"  that  explains  the  operation  of  the 
Law  of  Diminisliing  Returns.  The  productive 
powers  of  man  must  be  so  ordered  by  intelligent 
cooperation  that  the  addition  of  factors  inferior  to 
those  in  former  use  may  raise  the  volume  of  pro- 
ductive power  by  a  total  larger  than  that  repre- 
sented by  the  numerical  proportion  which  the  new 
units  of  labour-power  bear  to  the  old  aggregate 
supply. 

§  4.  It  is  difificult  to  know  whether  we  ought 
to  classify  capital  with  land  or  with  labour  in 
respect  of  increasing  or  diminishing  returns.  An 
addition  to  the  stock  of  capital  obtained  by  lower- 
ing the  margin  of  employment  may  be  represented 
as  giving  an  increased  efficiency  to  the  capital 
in  earlier  use,  by  allowing  more  specialisation  of 
capital.  But  since  this  increased  efficiency  or 
productivity  would  be  inseparable  from  the  em- 
ployment of  an  increased  volume  and  division  of 
labour-power,  such  increasing  return  would  best 
seem  attributable  to  economy  of  increased  labour- 
power. 

The  actual  effect  of  a  demand  for  increased 
capital  is  of  course  often  to  introduce  improved 
forms  of  capital,  which,  so  far  from  needing  for 
their  utilisation  an  increased  supply  of  labour- 
power,  cause  a  net  displacement  of  direct  em- 
ployment, taking  the  business  as  a  whole.  But 
this  case  is  not  an  illustration  of  a  lowering 
of  the  margin  of  employment,  for  the  new  forms 


200       TUE  ECONOMICS   OF  DISTRIBUTION. 

of  capital  called  into  use  are  not  inferior  to  the 
old;  it  is  parallel  to  the  opening  up  of  a  new  rich 
tract  of  land,  which  may  for  a  time  reverse  the 
normal  tendency  whereby  an  increased  demand 
calls  inferior  lands  into  use. 

If,  however,  this  analogy  does  not  dispose  of 
the  case  of  improvements  in  quality  of  capital- 
forms,  it  will  he  necessary  to  refer  this  apparent 
application  of  a  law  of  increasing  returns  for  capi- 
tal to  the  labour  represented  by  the  invention  of 
the  new  forms  taken  by  the  increment  of  capital. 
The  capitalist  below  the  margin  of  employment  is, 
qua  capitalist,  capable  of  putting  in  the  field  of  in- 
dustry only  the  customary  form  of  capital;  the  in- 
terest paid  him  for  this  cost  of  saving  is  the  price 
for  producing  an  increment  of  the  old  forms  of 
capital.  These  new  copies  of  the  old  forms  of 
capital  cannot,  I  think,  be  rightly  or  conveniently 
regarded  as  giving  such  increased  efficiency  to 
the  similar  forms  which  have  been  functioning  in 
industry  as  to  afford  an  increasing  return  to  the 
increased  aggregate. 

While,  therefore,  I  claim  that  it  is  convenient 
to  attribute  direct  productivity  to  forms  of  land 
and  capital,  an  increased  demand  for  their  use, 
which  compels  recourse  to  inferior  or  more  expen- 
sive portions,  can  exercise  this  compelling  power 
only  in  conformity  Avith  tlie  Law  of  Diminish- 
ing Returns,  by  raising  the  former  })rice  of  each 
unit  of  land-use  or  capital-use.     This  is,  of  course, 


THE  FACTORS  OF  PRODUCTION.  201 

not  inconsistent  with  the  general  tendenc}'  of  the 
rate  of  profit  or  real  interest  to  fall.  Although 
there  may  be  a  growing  Avillingness  to  save  for  a 
lower  rate  of  remuneration,  still,  if  we  compare 
the  actual  saving  which  takes  shape  in  capital 
with  the  potential  saving  which  might  take  shape, 
we  must  regard  the  latter  as  lying  below  the  mar- 
gin of  employment,  and  only  capable  of  coming 
into  actual  existence  on  condition  of  a  higher  rate 
of  interest  than  is  paid  for  capital  already  in  use. 

Only  when  we  take  the  productive  prices  of 
labour-power  which  function  at  the  command  of 
the  human  will,  do  we  escape  the  limits  set  by 
the  material  world  upon  industry.  So  long  as  we 
persist  in  measuring  labour-power  in  independent 
units,  we  fail  to  understand  the  vital  law  of  in- 
dustrial growth.  The  Law  of  Increasing  Returns 
is  simply  the  law  of  intelligent  cooperation. 

§  5.  This  is  nothing  but  a  necessary  theoretic 
preface  to  the  study  of  progressive  production  in 
the  several  industries. 

When  we  have  grasped  the  idea  that  a  composite 
margin  of  employment  must  be  substituted  for  a 
land  margin,  we  shall  be  obliged  to  work  out  in 
each  case  of  increased  supply  the  problem  how  far 
this  new  increment  of  supply  lowers  the  margin, 
and  how  the  lower  margin  is  composed. 

At  this  point  we  perceive  the  identity  of  the 
theory  of  the  Composition  of  Price  with  the 
theory  of  Distribution. 


202       TUB  ECONOMICS   OF  DISTRIBUTION. 

In  order  to  illustrate  the  operation  of  the  Law 
of  Rent  as  the  determinant  in  distribution,  it  will 
be  best  to  take  the  case  of  an  increase  in  the 
product  to  be  distributed.  Our  question  then 
will  be,  What  determines  the  proportion  of  the 
increased  product  which  goes  to  the  owners  of  the 
three  requisites  of  production  ?  or,  in  other  words, 
reverting  to  our  general  application  of  the  law  of 
rent.  What  determines  the  rise  of  marginal  and 
differential  rents  in  the  case  of  land,  capital,  and 
labour,  respectively?  Let  us  assume,  for  con- 
venience, that  the  increased  product  requires  for 
its  production  an  additional  quantity  of  land, 
capital,  and  labour,  involving  a  proportionately 
equal  increase  in  all  three  factors  of  production, 
e.g.  a  rise  of  10%  in  the  quantity  of  each  factor 
industrially  employed.  How  will  this  increased 
demand  for  the  use  of  the  factors  of  production 
affect  the  proportion  in  which  the  product  shall 
be  distributed? 

If  the  demand  for  use  of  more  land,  capital, 
and  labour  can  be  met  by  the  employment  of  a 
new  supply  of  each,  lying  just  below  the  margin 
of  employment,  but  only  nominally  inferior  to  the 
supply  in  previous  use,  the  prices  of  use  of  land, 
capital,  and  labour  will  not  appreciably  rise,  and 
the  new  product  will  be  divided  among  the  three, 
in  strict  accordance  with  the  previous  proportions. 
In  tliiit  case,  llie  fall  of  the  margin  of  employment 
and  the  rise  in  rental  of  each  rent-paying  portion 


THE  FACTORS   OF  PRODUCTION.  203 

of  the  land,  capital,  and  labour  in  previous  use 
will  be  very  slight  —  just  sufficient  to  call  into 
economic  existence  the  required  increase  of  sup- 
pl3^  But  if,  while  there  is  plenty  of  land  and 
capital  available,  of  barely  inferior  quality  to  that 
on  the  margin  of  employment,  an  equal  addition 
to  the  supply  of  labour  is  not  so  easily  procurable, 
the  growth  of  demand  for  labour  acting  in  relation 
to  a  fixed  supply  will  raise  the  price  or  rent  of 
labour  above  the  margin  of  employment  until  that 
margin  is  driven  down  low  enough  to  include  the 
required  new  supply.  That  is  to  say,  while  in 
the  case  of  land  and  capital  a  merely  nominal  fall 
of  the  margin  involving  a  nominal  rise  of  rent  has 
produced  the  new  supply,  in  the  case  of  labour  a 
considerable  fall  of  the  margin,  attended  by  a  con- 
siderable rise  of  rent,  has  been  required  to  produce 
a  corresponding  increase  of  supply.  Thus,  while 
the  rent  of  land  and  capital  remain  practically  at 
the  same  level  as  before,  the  rent  of  labour  will 
have  risen  greatl}^  and  will  absorb  almost  the 
whole  of  the  increased  product,  shifting  the  bal- 
ance of  proportion  in  the  distribution  of  the  aggre- 
gate product  among  the  industrial  community. 

The  advantageous  position  here  accorded  to 
labour  may  with  equal  reason  be  assigned  to  land 
or  capital.  In  proportion  to  the  difficulty  of  sup- 
plying each  increased  quantity  of  the  several 
requisites  of  production,  will  be  the  rise  in  price 
of  each  unit  of  those  factors  already  in  use.     The 


204       THE  ECONOMICS   OF  DISTRIBUTION. 

meclianism  by  which  this  operates  is  very  simple. 
The  rise  of  price  will  be  caused  by  the  deficiency 
of  available  supply  considered  in  relation  to  an 
increased  demand  reckoned  at  former  prices ;  the 
new  supply  can  only  be  brought  into  the  same 
quantitative  relation  to  the  new  demand  by  the 
maintenance  of  a  new  price  per  unit  of  productive 
power,  the  new  price  representing  in  relation  to 
the  old  the  greater  difficulty  of  keeping  in  eco- 
nomic use  the  determinant  portion  of  supply  of 
that  factor  of  production. 

Thus  we  reach  the  law  that  the  proportion  of  the 
aggregate  product  which  is  paid  as  rent  of  land, 
of  capital,  and  of  labour  varies  with  the  difficulty 
of  keeping  in  economic  use  the  quantity  of  each 
factor  of  production  required  to  maintain  the  rate 
of  current  production.  As  there  is  vacant  land 
below  the  margin  of  cultivation  (i.e.  yielding  less 
productive  power  per  acre  than  can  be  utilised  at  a 
given  amount  of  expenses  of  cultivation  per  acre), 
so  there  is  potential  capital  (i.e.  capital  containing 
powers  of  productivity  too  low  to  defray  working 
expenses  at  formerly  current  remuneration,  but 
which,  given  a  sufficient  motive,  will  become 
active  forms  of  capital) ;  and,  lastly,  there  is  va- 
cant labour  of  inferior  quality  (i.e.  a  larger  quan- 
tity of  which  is  required  to  furnish  a  given 
amount  of  effective  labour-power).  In  each  case, 
the  potential  or  unemployed  factor  is  called  into 
economic  use  by  a  sufficient  rise  in  the  rent  of  that 


THE  FACTORS  OF  PRODUCTION.  205 

which  lies  above  the  existing  margin  of  employ- 
ment. 

This  theory  that  changes  in  the  proportionate 
payments  to  land,  capital,  and  labour,  are  depend- 
ent upon  the  comparative  ease  or  difficulty  of  in- 
creasing the  supply  of  eacli,  would  seem  so  obvious 
a  truth  that  it  could  not  have  failed  to  secure  ade- 
quate recognition.  That  it  has  failed  to  do  so 
must  be  attributed  to  the  extreme  reluctance  which 
economists  have  shown  to  admit  the  truth,  that  the 
only  immediate  cause  of  a  change  of  price  is  a  pre- 
vious change  in  the  quantitative  relation  of  supply 
and  demand  at  current  prices.  If  it  were  once 
clearly  recognised  that  a  restriction  of  supply  at 
current  prices  were  the  only  possible  immediate 
cause  of  a  rise  of  price,  and  if  this  were  kept  in 
mind  in  dealing  with  the  prices  of  the  use  of  land, 
capital,  and  labour,  the  main  difficulty  in  forming  a 
satisfactory  theory  of  distribution  would  disappear. 

It  will  perhaps  be  convenient  to  sura  up  the 
conclusions  so  far  reached  in  the  following  three 
propositions:  — 

1.  If  there  exists  an  indefinite  quantity  of  each 
of  the  factors  of  production  just  below  the  margin 
of  employment,  of  almost  equal  quality  to  that 
upon  the  margin,  an  increase  in  production  will 
neither  alter  the  proportion  of  distribution  among 
the  owners  of  the  three  factors  nor  appreciably 
raise  the  differential  rent  of  each  portion  of  a 
factor  above  the  marcrin. 


206       THE  ECONOMICS   OF  DISTRIBUTION, 

2.  If  there  is  not  a  sufficient  quantity  of  any  of 
the  factors  of  production  easily  available  for  new 
supply,  and  the  difficulty  of  procuring  each  piece 
of  additional  supply  is  equal  in  the  case  of  each 
factor,  the  differential  rent  of  each  rent-paying 
piece  of  land,  capital,  and  labour  will  rise,  but  the 
proportion  of  distribution  of  the  aggregate  pro- 
duct will  remain  unchanged. 

3.  If  there  is  a  difference  in  the  amount  of 
difficulty  of  procuring  the  increased  supply  of  the 
three  factors,  that  difference  will  be  accurately 
measured  by  the  relative  rise  in  rent  of  the  rent- 
paying  portion  of  each  factor,  and  by  a  corre- 
sponding alteration  in  the  proportion  of  the 
aggregate  product  which  falls  to  each,  i.e.  if  it 
is  desirable  to  increase  by  20%  the  quantity  of 
each  factor  of  production  in  order  to  increase  the 
product,  and  it  is  twice  as  difficult  to  procure  the 
increased  quantity  of  land  as  of  capital  and  labour, 
one-half  of  the  increased  product  will  go  as  rent 
to  land,  one-quarter  as  rent  to  capital,  one-quarter 
as  rent  to  labour. 

Ill  applying  the  rule  of  measurement  thus  far, 
we  have  assumed  the  case  where  the  increase  of 
production  acts  as  a  call  for  an  increase  in  the  use 
of  the  three  factors  which  is  proportionately  equal. 
But,  in  fact,  it  is  of  course  seldom  the  case  that 
the  proportionate  part  played  by  the  respective 
factors  of  production  remains  the  same  when 
there  is  an  increase    of   production.       It   by  no 


THE  FACTORS   OF  PRODUCTION.  207 

means  follows  tliat  if  in  the  old  quantity  of  pro- 
duction the  numbers  3,  2,  5,  represent  the  respec- 
tive contributions  of  land,  capital,  and  labour,  and 
the  production  be  doubled,  the  same  proportion 
will  hold  among  the  contributors.  The  Law  of 
Substitution  is  constantly  operative,  enabling  capi- 
tal to  displace  labour,  economising  land  by  in- 
creased use  of  capital  or  labour.  ^  We  know,  in 
fact,  that  every  increase  in  the  aggregate  product 
will  be  attended  by  a  change  in  the  proportion  of 
the  contribution  of  the  three  factors.  Hence  the 
practical  application  of  our  rule  of  measurement 
is  obviously  no  easy  task.  For  every  change  in 
the  distribution  of  the  aggregate  product  will  de- 
pend on  the  relative  strength  of  two  forces  :  first, 
the  relative  growth  in  the  demand  for  each  factor 
signified  by  the  increased  product ;  second,  the 
relative  difficulty  of  supplying  that  increased  de- 
mand. The  frequent  use  of  the  word  "  relative  " 
here  is  itself  a  proof  of  the  complex  nature  of  the 
problem.  Before  we  can  say  in  what  degree  an 
increase  of  10%  in  the  aggregate  production  of  a 
community  will  affect  the  proportionate  distribu- 
tion, we  should  have  first  to  ascertain  two  facts : 
(x)  the  precise  amount  of  land,  capital,  and  labour 

1  Bohm-Bawerk,  in  his  treatment  of  The  Value  of  Comple- 
mentary Goods,  clearly  and  accurately  indicates  the  importance 
of  the  Law  of  Substitution  among  the  requisites  of  production  in 
determining  the  amount  of  remuneration  which  each  of  the 
several  factors  obtains.  He  first  shows  relative  indispensability 
as  the  measure  of  economic  force. 


208       THE  ECONOMICS   OF  DISTRIBUTION. 

required  to  take  part  in  the  new  production  and 
the  proportion  each  addition  bears  to  the  quantity 
in  previous  use  ;  and  (y)  tlie  extent  of  the  fall  in 
margin  of  employment  necessary  to  furnish  in  the 
case  of  each  factor  the  desired  increase.  Now, 
each  of  these  two  facts,  x  and  ^,  is  itself  a  resultant 
of  various  conflicting  forces,  and  can  only  be  as- 
certained by  an  elaborate  calculation. 

A  whole  group  of  considerations  affects  the  pro- 
portionate increase  of  each  factor  of  production 
required  by  each  increase  in  the  aggregate  pro- 
duction. Among  them  the  following  are  most 
prominent :  — 

1.  Improvements  in  the  industrial  arts,  and 
application  of  labour-saving  machinery,  (a)  ena- 
bling the  same  quantity  of  capital  to  suffice  in 
turning  out  an  increased  product,  (5)  enabling 
capital  to  take  the  place  of  labour,  so  that  what 
might  seem  to  be  an  equal  demand  for  more  capi- 
tal and  more  labour,  will  act  as  a  demand  for  a 
large  quantity  of  new  capital  and  a  small  quantity 
of  new  labour. 

2.  Social  and  industrial  reforms,  improving  the 
organisation  of  labour,  or  inducing  greater  care  and 
economy  in  the  use  of  material  and  of  machinery, 
will,  by  adding  to  the  average  effectiveness  of  both 
capital  and  labour,  enable  an  increase  in  the  aggre- 
gate product  to  be  achieved  by  a  less  than  corre- 
sponding increase  of  capital  and  labour.  Even  here 
the  movement  is  not  simple,  but  complex.     £!.g. 


THE  FACTORS  OF  PRODUCTION.  209 

in  the  case  of  economy  effected  by  cooperation  or 
profit-sharing,  so  far  as  the  economy  consists  in 
greater  care  of  machinery  and  less  waste  of  mate- 
rial, it  might  operate  as  an  equal  check  upon  the 
increased  quantity  of  both  capital  and  labour  re- 
quired to  furnish  an  increased  product.  So  far 
as  it  acted  merely  as  a  stimulus  to  greater  work- 
ing activity,  it  would  figure  chiefly  as  economy  of 
labour,  so  that  an  increased  product  might  be 
wrought  by  the  same  quantity  of  labour  acting  in 
conjunction  with  an  increased  quantity  of  capital. 

3.  Every  improvement  of  physique,  morale,  in- 
telligence, and  technical  skill  among  the  workers 
will  enable  a  demand  for  more  labour-power  to  be 
satisfied  by  a  less  than  corresponding  increase  in 
the  number  of  workers. 

4.  Improvement  in  agricultural  arts  may  en- 
able a  larger  product  to  be  obtained  without  a 
corresponding  fall  in  the  margin  of  cultivation, 
i.e.  without  a  correspondingly  increased  employ- 
ment of  land. 

These  are  some  of  the  determining  forces  which 
would  require  study  before  we  could  reach  the 
resultant  x.  Another  set  of  forces  and  circum- 
stances affect  the  ease  or  difficulty  of  procuring 
increased  supplies  of  the  respective  factors  of 
production.     Such  are  the  following:  — 

1.  The  effect  of  growing  improvements  in 
communication,  and  the  breaking  down  of  inter- 
national barriers   for   trading   purposes,  in   their 


210       THE  ECONOMICS   OF  DISTRIBUTION. 

respective  bearing  upon  (a)  the  increase  of  the 
effective  land  supply  for  a  given  community,  (6) 
the  increased  "  fluidity  "  of  capital,  (c)  the  easier 
migration  of  labour. 

2.  The  effect  of  war,  political  insecurity,  na- 
tional commercial  restrictions,  and  the  like,  as 
affecting  (a)  the  available  quantity  of  each  requi- 
site of  production,  (b)  the  relative  fluidity  of  each 
factor  of  production. 

3.  Effects  of  the  growth  of  prudential  motives, 
increased  sense  of  security,  and  fluidity  of  capital, 
as  affecting  the  ease  with  which  an  increased  de- 
mand for  capital  may  be  supplied. 

4.  Complicated  effects  of  rising  standard  of 
comfort,  education,  artificial  checks  on  population, 
and  the  like,  in  determining  the  increased  supply 
of  labor  at  different  degi'ees  of  availability. 

It  is  not  too  much  to  say  that  each  of  these 
considerations  opens  up  a  large  field  for  specula- 
tion and  involves  special  dilflculties  of  its  own. 
Each  of  them  has  an  importance  in  assisting  to 
determine  the  resultants  x  and  y.  But,  unfortu- 
nately, this  is  not  all.  x,  representing  the  amount 
of  land,  labour,  and  capital  required  for  an  in- 
creased production  of  commodities,  or  any  single 
commodity,  is  not  tlie  simple  composite  we  have 
assumed  it  to  be.  The  land  it  represents  is  itself 
com})osed  of  a  great  variety  of  land-uses  entering 
into  llu!  different  processes  of  production,  some 
with  differential    rents  measured  from  a  no-rent 


EFFECTS.  211 

margin,  others  with  differential  rents  measured 
from  positive  margins.  In  some  of  these  cases 
the  increased  demand  for  commodities  will  greatly 
lower  the  margin,  raising  largely  the  differential 
rents;  in  other  cases  the  increased  supply  can  be 
afforded  by  a  very  small  fall  of  the  margin;  in 
otlier  cases,  maybe,  the  fall  of  margin  may  be  ob- 
viated b}^  a  change  of  method  of  production  which 
will  economise  land-use  by  increasing  uses  of  capi- 
tal and  labour  in  conformity  with  the  Law  of  Sub- 
stitution. Thus  the  effect  of  increased  demand 
for  land-use  will  affect  differently  the  land-use 
employed  in  all  the  processes.  The  same  will 
apply  to  capital  and  labour,  various  specific  and 
individual  forms  of  which  will  contribute  to  the 
production  of  supply  at  different  points.  When, 
therefore,  we  consider  what  would  be  the  effect 
of  an  increase  of  supply  of  10  %  of  any  com- 
modity in  affecting  the  proportion  of  the  price 
which  will  be  paid  to  the  owners  of  the  different 
factors,  we  are  evidently  faced  by  a  very  complex 
computation.  The  determination  of  both  x  and  y 
has  to  be  made  first  separately  at  each  point  in 
production.  But  even  that  will  not  suffice.  Not 
only  should  we  have  to  measure  the  relative  press- 
ure with  which  these  two  forces  act  at  each  sev- 
eral point  in  the  increase  of  production,  in  order 
to  reach  the  change  in  the  proportionate  distribu- 
tion. For  alas!  x  and  y  cannot  be  determined  as 
entirely  different  forces.     These    are  not  merely 


212       THE  ECONOMICS  OF  DISTRIBUTION. 

two  varying  forces,  but  varying  forces  which  act 
upon  one  another  with  a  force  which  likewise 
varies.  What  we  mean  is  this:  it  is  impossible  to 
state  accurately  how  much  new  land  capital  and 
labour  would  be  used  to  furnish  an  increased 
product,  unless  we  know  already  the  amount  of 
difficulty  there  would  be  in  procuring  that  in- 
creased supply;  for  we  cannot  without  that  know- 
ledge determine  how  far  labour-saving  machinery 
may  be  introduced  instead  of  an  increased  quantity 
of  labourers,  nor  can  we  determine  how  far  the 
increased  demand  for  land  will  operate  in  intenser 
or  more  efficient  culture  of  the  land  already  above 
the  line  of  occupation,  instead  of  stimulating  the 
enclosure  of  hitherto  unused  land.  On  the  other 
hand,  it  will  be  evident  that  we  cannot  ascer- 
tain exactly  the  amount  of  fall  in  the  margin 
of  employment  of  the  three  factors  of  produc- 
tion, unless  we  know,  not  merely  what  increased 
product  is  required,  but  also  to  what  extent 
this  increased  demand  will  act  upon  the  three 
factors  of  production  respectively,  —  in  fact,  until 
wo  know  the  resultant  x.  As  the  two  main 
forces,  which  for  convenience  we  regarded  as 
distinct,  are  thus  seen  to  modify  one  another,  the 
full  nature  of  the  complexity  of  the  problem  of 
(listril)ution  begins  to  dawn  upon  us.  In  order 
accurately  to  ascertain  the  disturbance  in  propor- 
tionate distribution  of  the  product  between  land, 
liiboiii',  and  capital  caused  by  an  increase  or  de- 


EFFECTS.  213 

crease  of  production,  we  have  in  effect  to  measure 
the  varying  pressure  of  a  number  of  industrial 
forces  (which  pressure  also  varies  in  the  rate  of 
its  variation),  each  of  which  affects  a  number 
of  other  forces  with  different  degrees  and  varying 
rates  of  attraction.  We  have  m,  v,  iv,  x,  ?/,  z,  etc., 
all  moving  at  different  rates,  and  all  affecting  one 
another  to  a  different  degree  in  proportion  to  the 
force  of  their  respective  motions. 

Such  is  the  intricate  theoretic  setting  of  the 
problems  which  have  to  be  worked  out  by  the 
managers  of  businesses  and  by  the  organisers  of 
labour.  In  each  trade,  at  each  time,  in  each 
countr}^,  the  problem  will  be  different.  Indeed, 
if  we  take  the  standpoint  of  nationalism  in  eco- 
nomics, and  ask  what  the  effect  upon  the  demand 
for  the  several  factors  for  the  different  processes 
in  a  particular  country  will  be,  arising  from  an 
increased  demand  for  a  class  of  commodities,  we 
have  to  consider  not  merely  the  purely  economic, 
but  also  the  political  considerations  which  move 
nations  in  this  trade  competition. 

Those  whose  business  it  is  to  work  out  the 
probable  influence  upon  profits  or  wages  of  an 
assumed  increase  or  decrease  of  production  in  a 
particular  trade,  are  compelled  to  consider  the 
cooperation  of  all  these  forces,  so  far  as  they  are 
ascertainable.  The  success  of  a  particular  capi- 
talist enterprise  or  of  a  labour  movement  will 
ever    more   largely  depend    upon   the    skill    and 


214       TUE  ECONOMICS   OF  DISTRIBUTION. 

experience  of  those  responsible  for  such  compu- 
tation. 

We  have  now  discussed  the  changes  in  termi- 
nology and  in  point  of  view  requisite  to  coordinate 
land,  labour,  and  capital,  so  as  to  measure  their 
influence  upon  price  and  their  respective  strength 
as  claimants  upon  the  general  product.  We  have 
seen  that  the  conception  of  a  margin  of  employ- 
ment with  differential  rents  for  more  productive 
forms  is  equally  applicable  to  all  three  factors, 
while  a  right  regard  for  the  Law  of  Substitution 
involves  the  application  of  a  composite  margin 
of  employment  in  considering  the  effect  of  an 
increased  or  a  decreased  demand  for  productive 
energy  upon  the  distribution  of  the  product 
among  the  owners  of  the  factors. 

It  has  also  appeared  that  the  process  of  deter- 
mining the  price  of  a  supply  of  land,  labour,  or 
capital  is  substantially  the  same  as  the  process  of 
determining  the  price  of  a  supply  of  commodities, 
when  acres,  labourers,  and  XlOO's  of  capital  are 
reduced  to  some  standard  measure  of  the  produc- 
tive power  which,  underneath  the  irregularities 
of  form,  is  the  real  object  of  sale.  The  price- 
point  for  the  sale  of  a  unit  of  land-power,  capital- 
power,  labour-power,  is  determined  by  the  stronger 
of  a  final  pair  of  bargainers  within  limits  reached 
by  competition  of  buyers  and  sellers  of  these  fac- 
tors of  production.  The  wide  external  differences 
between  a  market  for  goods  and  a  market  for  sale 


EFFECTS.  215 

of  the  several  factors,  where  competition  is  often 
extremely  slow,  indirect,  and  incomplete,  must  not 
blind  us  to  the  substantial  identity  of  the  economic 
processes.  When  the  competition  is  slight  and 
imperfect,  the  result  is  that  the  upper  and  lower 
limits  of  price  are  wider  apart  than  in  a  freely 
competitive  market  for  goods,  so  that  the  eco- 
nomic force  of  the  stronger  of  the  final  bargainers 
has  fuller  scope.  The  contrast  between  the  money- 
market  or  the  wool-market  under  normal  condi- 
tions, and  the  market  for  sale  of  land-uses  in  a 
groAving  city,  is  no  doubt  a  striking  one ;  but 
though  competition  lapses  at  a  far  earlier  point 
in  the  latter  than  in  the  former  cases,  the  differ- 
ence is  one  of  degree  and  not  of  kind.  In  both 
cases,  competition  between  buyers  and  sellers, 
in  both  cases,  economic  force  are  determinants  of 
price,  though  to  different  extents. 

To  tliose  who  are  lovers  of  simplicity  this  may 
not  seem  a  very  satisfactory  result,  but  a  large 
part  of  the  disrepute  from  which  the  science  of 
economics  suffers  among  "  practical "  men  is  due, 
not,  as  is  often  alleged,  to  an  inherent  distaste  for 
theoretic  treatment,  but  to  the  hasty  fabrication 
of  economic  laws  which  are  so  delightfull}'  simple 
that  an  attempt  is  made  to  use  them  as  "  rules 
of  thumb  "  in  the  actual  movements  of  industry. 
They  are  then  found  to  be  inap2)licable,  and  the 
practical  man  is  not  satisfied  with  the  scientific 
economist's  elaborate  explanations  of  the  difficul- 


216       THE  ECONOMICS   OF  DISTRIBUTION. 

ties  involved  in  applying  economic  laws  to  details 
of  economic  fact. 

These  intricate  considerations  teach  caution. 
They  are  often  used  to  suggest  inertia.  Many 
of  the  forces  involved  are  quite  incapable  of  accu- 
rate measurement,  and  it  may  easily  be  shown  that 
it  is  impossible  to  predict  with  any  degree  of  cer- 
tainty the  effect  upon  profits  or  employment  of 
a  particular  industrial  action  involving  a  change 
in  demand  for  the  several  factors  of  production. 
But  this  does  not  justify  inaction.  Human  con- 
duct is  always  speculative;  the  future  never  admits 
of  exact  propliecy ;  risk  and  faith  are  at  all  points 
essential  to  progress.  A  reasonable  man  is  pre- 
pared to  take  ordinary  chances,  his  calculations 
are  confined  to  a  comparatively  small  number  of 
factors,  and  these  not  exactly  measured;  after  a 
reasonable  computation  of  certain  large  issues  he 
can  often  afford  to  ignore  smaller  ones.  Wide 
experience  produces  a  capacity  of  judgment  which 
is  apparently  intuitive,  though  strictly  ratiocina- 
tive  in  its  secret  working. 

Hence  large  industrial  movements  affecting  the 
production  and  the  distribution  of  wealth  are  often 
rigidly  guided  by  a  clear  grasp  of  certain  leading 
facts  or  generalisations.  For  example,  large  or- 
ganisations of  labourers  may  be  quite  incapable 
of  working  out  all  the  intricate  effects  upon  each 
trade,  of  a  general  policy  of  higher  wages  or  shorter 
hours  ;  but  they  may  liave  a  right  knowledge  that 


EFFECTS.  217 

the  conditions  of  barj^aining  between  labourers 
and  employers  are  on  the  average  so  favourable 
to  the  latter  as  to  place  in  their  hands  a  large 
surplus  of  wealth,  the  diversion  of  which  into 
higher  wages  or  more  leisure  is  economically  fea- 
sible. Possessing  such  knowledge,  they  will  not 
rightly  be  deterred  from  action  by  the  real  risks 
involved  by  the  pressure  of  other  unknown  or  in- 
calculable forces  upon  certain  sections  of  labourers. 
It  is  sufficient  if  they  make  good  use  of  such  know- 
ledge as  they  can  get.  Human  conduct  is  notori- 
ously enfeebled,  or  even  sterilised,  by  the  growing 
conviction  of  risk  and  uncertainty  which  weighs 
upon  the  student  who  comes  to  realise  the  infinity 
of  knowledge  in  any  department  of  inquiry.  The 
practical  man  has  to  decide  for  himself  how  much 
he  may  safely  leave  unknown,  though  he  can  never 
know  exactly  how  much  this  is,  and  what  risks 
he  must  be  prepared  to  run,  though  the  precise 
size  and  nature  of  these  very  risks  must  always 
baffle  him. 


CHAPTER  VII. 

BARGAINS  FOR  THE  SALE  OP  LABOUR-POWER, 

§  1.  There  are  certain  special  considerations 
affecting  the  sale  of  labour-power  which  make 
the  sellers  of  that  commodity  normally  weaker 
than  the  buyers. 

This  normal  condition  of  inferior  strength  is 
often  summed  up  by  saying  that  it  is  more  im- 
portant or  more  pressing  for  the  individual  owner 
of  labour-power  to  effect  a  sale  than  for  the  em- 
ployer to  effect  a  purchase. 

This  is  evidently  and  particularly  the  case  where 
there  exists  an  excess  of  any  kind  of  labour-power 
beyond  the  amount  required  at  a  price  which  would 
enable  minimum  business  profits  to  be  earned.  A 
supply  of  goods  or  of  land  which,  if  it  is  placed 
upon  the  market,  would  bring  down  prices  to  an 
unprofitable  level,  can  in  most  cases  be  withheld 
from  the  market  without  sustaining  irrepara- 
ble damage.  This  is  not  the  case  with  labour- 
power.  It  must  be  sold ;  if  not  sold  for  a  week, 
not  only  is  the  week's  supply  wasted,  but  the 
aggregate  of  labour-power,  the  labour-capital,  the 
labourer  himself,  perishes.  This  labour-power 
218 


THE  SALE  OF  LABOUR-POWER.  219 

must  be  sold  continuously;  it  must  be  sold  in 
small  quantities,  commonly  measured  by  the  day 
or  week ;  finally,  it  must  be  sold  to  a  buyer  who 
knows  the  necessity  under  which  the  seller  stands 
to  effect  a  sale.  In  a  word,  the  labourer  is  selling 
his  labour-power  under  the  conditions  of  a  forced 
sale.  In  a  labour-market  the  bargain  of  the  mar- 
ginal pair  (wliich  directly  rules  the  price)  will  be 
that  of  a  seller  whose  inability  to  refuse  a  bar- 
gain is  known  all  the  time,  to  the  buyer  with 
whom  he  is  "higgling  for  a  price."  Under  such 
circumstances  the  superior  force  of  the  buyer  is 
so  well  recognised  that  he  is  commonly  able  to 
avoid  the  necessity  of  higgling,  and  to  dictate  a 
customary  price  of  labour.  Again,  the  organic 
continuity  of  an  individual's  labour-power,  the 
fact  that  one  week's  energy  is  vitally  connected 
with  the  next  week's,  makes  his  weakness  in  bar- 
gaining a  cumulative  disadvantage. ^  A  bad  sale 
for  a  number  of  weeks  or  months,  a  failure  to 
obtain  regular  and  proper  employment  at  reason- 
able wages,  brings  about  a  deterioration  of  work- 
ing efficiency  for  the  following  weeks,  and  perhaps 
a  permanent  injury  to  physique  and  morale. 

These  weaknesses  of  bargaining  attach  to  labour- 
power,  as  distinct  from  other  things  tliat  are  sold, 
because  labour-power  cannot  be  detached  from 
the  vitality  of  which  it  is  a  function. 

Putting  this  peculiarity  in  another  form,  we 
1  Cf.  Slaivshall,  Principles,  2d  ud.,  Vol.  I.  p.  G02. 


220       THE  ECONOMICS   OF  DISTRIBUTION. 

may  say  it  resides  in  the  fact  tliat,  while  the 
worker  is  selling  a  portion  of  his  labour-power, 
he  is  also  buying  the  permission  to  live,  and  the 
future  production  of  his  labour-power  depends 
upon  the  terms  of  this  purchase.  Hence,  while 
the  employer  is  directly  concerned  only  with  the 
purchase  of  labour-power,  the  inevitable  terms  of 
such  a  purchase  give  him  power  over  other  vital 
functions  which  he  does  not  buy,  but  which  are 
"thrown  in  for  nothing."  What  I  mean  is  ad- 
mirably summed  up  by  Mrs.  Webb :  "  The  wage- 
earner  does  not,  like  the  shopkeeper,  merely  sell 
a  piece  of  goods  which  is  carried  away  ;  it  is  his 
whole  life,  which,  for  the  stated  term,  he  places 
at  the  disposal  of  his  emplo3^er.  What  hours  he 
shall  work,  when  and  where  he  shall  get  his 
meals,  the  sanitary  conditions  of  his  employ- 
ment, the  safety  of  the  machinery  and  tempera- 
ture to  which  he  is  subjected,  the  fatigues  or 
strains  which  he  endures,  the  risks  of  accident  or 
disease  which  he  has  to  incur,  —  all  these  are  mat- 
ters no  less  important  to  the  workman  than  his 
wages.  Yet  about  the  majority  of  these  vital 
conditions  he  cannot  bargain  at  all."^ 

Even  if  he  can  bargain,  he  bargains  at  a  grave 
normal  disadvantage.  Even  where  collective  bar- 
gaining has  largely  taken  the  place  of  individual 
bargaining,  the  power  of  labourers  to  get  adequate 
safeguards  against  the  abuse  of  these  individual 
^  CommotiweaUh,  February,  1896. 


THE  SALE  OF  LABOUB-POWER.  221 

risks  and  hardships  has  been  small,  and  as  they 
are  no  proper  part  of  what  is  offered  in  the  sale  of 
labour-power,  no  monetary  compensation  is  appro- 
priate and  no  monetary  valuation  possible.  "  All 
that  a  man  hath  will  he  give  for  his  life."  The 
necrosis  of  the  phosphorus  match-maker,  the 
phthisis  of  the  Belfast  linen-spinner,  are  not  part 
of  any  bargain  and  are  not  paid  for. 

§  2.  How  far  the  process  of  collective  bargain- 
ing improves  the  relative  position  of  the  sellers 
of  labour-power,  so  far  as  the  price  is  concerned, 
it  is  difficult  to  judge.  Bearing  in  mind  that 
capital  is  generally  far  more  advanced  in  collec- 
tive organisation  than  labour  (each  large  employer 
bringing  a  large  number  of  closely  welded  units 
of  joint-stock  capital  to  confront  the  much  more 
loosely  and  imperfectly  welded  units  of  labour- 
power),  it  is  difficult  to  believe  that  the  substi- 
tution of  the  labour-group  for  the  single  labourer 
can  redress  the  balance  of  advantage  on  the  side 
of  the  employer.  This  involves  no  depreciation 
of  trade-unionism  ;  a  group  of  labourers  bargain- 
ing for  a  sale  of  labour-power  over  a  long  period 
of  time,  through  skilled  agents,  is  absolutely  in  a 
far  stronger  case  than  a  single  labourer,  higgling 
like  an  ignorant  amateur.  But  where  organisa- 
tion of  capital  has  made  similar  advances,  the 
relative  advantage  of  the  employer  may  be  as 
great  as  ever.  For  any  modern  struggle  between 
equally  developed  organisations  of  manual  workers 


222       THE  ECONOMICS  OF  DISTRIBUTION. 

and  employers,  so  far  as  it  is  left  to  economic 
might,  untempered  by  legal  or  charitable  interfer- 
ence, exhibits  the  superior  power  of  the  employer 
resting  on  the  fact  that  the  sale  of  labour-power 
involves  the  purchase  of  the  right  to  live ;  the 
power  to  starve  labour  into  submission  still  sur- 
vives as  the  final  economic  arbiter.  So  far  as 
organisations  of  lal:>ourers  can  modify  or  postpone 
this  superiority  of  the  employer,  it  is  not  by  the 
mere  substitution  of  collective  for  individual  bar- 
gains in  sales  of  labour-power,  but  by  amassing  a 
fund  of  capital  so  that  they  may  no  longer  con- 
tend as  mere  proletariat.  The  attempt  of  a  trade- 
union  with  accumulated  funds  to  fight  a  body  of 
employers  is  a  fight  of  capital  against  capital. 

§  3.  The  ordinary  process  by  which  the  wage  is 
immediately  determined  is  sometimes  regarded  as  a 
separate  disadvantage  to  the  labourer.  Whereas 
the  employer  may  have  before  him  a  number  of 
applicants  for  employment  who  will  closely  com- 
pete and  underbid  one  another,  it  does  not  often 
happen  that  employers  meet  face  to  face  and  di- 
rectly compete  to  buy  the  services  of  a  Itibourer. 
Thus  it  appears  that  the  levelling  tendency  of 
competition  is  less  operative  among  the  buyers 
of  labour  than  among  the  sellers.  The  immediate 
position  which  faces  an  unorganised  worker  ap- 
plying for  a  job  is  one  which  offers  hunger  and 
possible  starvation  as  the  alternative  to  accepting 
tlie  offer  of  an  employer;  for  though  there  may 


THE  SALE  OF  LAliOUR-POWER.  223 

be  other  employers  who  will  each  separately  be 
willing  to  make  an  offer,  he  cannot  rely  upon 
this  being  the  case,  nor  can  he  make  these  sev- 
eral employers  bid  directly  against  one  another. 
Where,  as  is  the  case  in  many  trades,  the  supply 
of  available  labour  is  normally  in  excess  of  the 
demand  at  the  standard  wage,  the  economic  weak- 
ness of  the  seller  of  labour  is  aggravated  by  this 
mode  of  conducting  the  sale. 

"  The  art  of  bargaining,"  observed  Jevons, 
"  mainly  consists  in  the  buyer  ascertaining  the 
lowest  price  at  which  the  seller  is  willing  to  part 
with  his  object,  without  disclosing,  if  possible, 
the  highest  price  which  he,  the  buyer,  is  will- 
ing to  give.  .  .  .  The  power  of  reading  another 
man's  thoughts  is  of  high  importance  in  business." 
"Now  the  essential  economic  weakness  of  the 
isolated  workman's  position  is  necessarily  knoAvn 
to  the  employer  and  his  foreman.  The  isolated 
workman,  on  the  other  hand,  is  ignorant  of  his 
employer's  position.  Even  in  the  rare  cases  in 
which  the  absence  of  a  single  workman  is  really 
inconvenient  to  the  capitalist  employer,  this  is 
unknown  to  any  one  outside  the  office.  What  is 
more  important,  the  employer,  knowing  the  state 
of  the  market  for  his  product,  can  form  a  clear 
opinion  of  how  much  it  is  worth  his  while  to  give, 
rather  than  go  without  the  labour  altogether,  or 
rather  than  postpone  it  for  a  few  weeks.  But  the 
isolated   workman,  unaided    by   any   trade-union 


224       THE  ECONOMICS   OF  DISTRIBUTION. 

official,  and  unable  to  communicate  even  with  the 
workmen  in  other  towns,  is  wholly  in  the  dark  as 
to  how  much  he  might  ask."  ^ 

The  condition  of  bargaining  for  sale  of  labour- 
power  which  I  have  described,  applies  in  its  ful- 
ness to  low-skilled  labour.  Of  such  labour  we 
may  say  that  the  normal  wage  is  one  of  bare 
subsistence,  unless  some  alternative  of  squatting, 
stealing,  begging,  or  public  charity  is  able  to 
qualify  it.  To  place  the  "marginal  labourer" 
of  such  a  class  upon  a  footing  of  equal  power  to 
bargain  with  the  marginal  employer  who  buys  his 
labour,  it  would  be  necessary :  — 

(a)  To  guarantee  him  and  his  family  a  full 
wage  of  economic  efficiency  as  an  alternative  to 
the  acceptance  of  competitive  employment. 

(6)  To  safeguard  him  in  his  giving  out  of 
labour-power,  against  conditions  of  work  which 
can  impair  his  efficiency  for  future  work. 

Just  in  so  far  as  certain  individuals  and  classes 
have  practically  obtained  these  securities,  the 
terms  upon  which  they  bargain  for  the  sale  of 
their  labour-power  are  superior  to  those  above 
described. 

Bodies  of  skilled  manual  workers  with  a  firm 
hold  on  an  important  labour-market,  where  capi- 
tal is  in  genuine  competition,  are  often  able  to 
maintain  a  standard  wage  for  the  marginal  labour, 
considerably  higher  than  tlie  wage  of  low-skilled 
1  Webb,  Industrial  Democracy,  Vol.  II,  p.  067. 


THE  SALE  OF  LABOUR-POWER.  225 

labour.  Possessing  a  "  corner "  of  some  highly 
serviceable  skill,  and  perhaps  some  resource  of 
capital,  they  can  reduce  considerably  the  advan- 
tage which  the  capitalist-employer  must  naturally 
possess  in  bargaining  with  a  proletarian.  As  we 
rise  to  tlie  professions  and  other  grades  of  skilled 
mental  Avorkers,  we  are  dealing  with  persons  who, 
by  reason  of  some  assistance  of  capital,  their  own 
or  others,  or  from  legitimate  confidence  in  some 
alternative  employment,  are  often  able  to  enter 
on  a  bargain  for  sale  of  this  skill,  upon  terms  of 
equal  or  even  superior  advantage  with  the  buyer. 

The  marginal  lawyer  or  the  marginal  doctor  in 
the  West-end  market  is  probably  able  at  least  to 
hold  his  own  in  the  slow  and  indirect  forms  of 
bargaining  which  fix  the  price  of  his  professional 
skill. 

In  each  labour-market  there  will  be  many  in- 
dividuals who  can  take  high  differential  rents, 
marking  their  superior  value  over  the  marginal 
seller.  These  differential  rents  seem  to  become 
both  absolutely  and  relatively  larger  as  we  ascend 
to  the  higher  grades  of  labour.  Indeed,  it  would 
be  straining  the  system  of  gradation  too  far  to 
apply  it  with  rigidity  to  the  most  highly  remuner- 
ated forms  of  personal  or  professional  service, 
where  what  is  sold  is  not  so  much  advice,  so 
much  acting  or  singing,  but  where  each  indi- 
vidual more  or  less  constitutes  a  market  of  his 
own,    drawing   monopoly    rents    rather   than   the 


226       THE  ECONOMICS   OF  DISTRIBUTION. 

differential  rents  which  arise  where  industrial 
services  of  a  more  routine  or  impersonal  order 
are  sold. 

§  4.  Socialism  and  labour-movements  in  general 
are  chiefly  motived  by  a  more  or  less  clear  percep- 
tion that  bargains  for  the  sale  of  labour-power 
differ  from  other  kinds  of  bargains  in  that  there 
is  a  considerable  normal  balance  of  economic 
strength  on  the  side  of  the  buyers.  An  applica- 
tion to  a  labour-market  of  the  analysis  applied  in 
Chapter  I  will  show  that  true  competition  gives 
way  at  a  point  which  leaves  a  marginal  labourer 
face  to  face  with  a  marginal  employer,  under  con- 
ditions which  enable  the  latter  to  fix  the  price 
close  to  the  lower  limit,  thus  assigning  a  "  forced 
gain  "  to  each  buyer  of  labour-power. 

It  is  the  perception  of  this  inequality  which 
places  in  the  forefront  of  social  questions  the 
rectification  of  methods  of  selling  labour-power. 
"In  any  given  state  of  industrial  morality," writes 
Mr.  Charles  Booth,  "the  social  value  of  competi- 
tion is  measured  by  its  equality  —  by  the  posses- 
sion of  equal  powers  both  mental  and  material  by 
both  sides  to  a  contract  or  a  bargain."^  No  such 
equality  exists,  or  can  exist,  until  equal  access  to 
all  economic  and  intellectual  opportunities  is  open 
to  all. 

^  Life  and  Labour  of  the  People,  Vol.  IV,  p.  214. 


CHAPTER   VIII. 

BARGAINS  FOR  THE  USE  OP  CAPITAL. 

§  1.  Some  special  mystery  has  been  often  sup- 
posed to  attach  to  bargains  for  the  use  of  capital. 
This  has  arisen  partly  from  people  failing  to 
understand  what  was  actually  sold  in  a  loan, 
what  it  was  that  interest  was  paid  to  buy,  and 
partly  from  certain  circumstances  historically  as- 
sociated with  lending  and  borrowing. 

I  have  held  a  number  of  sovereigns  in  my 
strong-box  for  some  time  past,  and  they  lie  there 
neither  increasing  nor  diminishing  in  number. 
You  come  and  entreat  the  loan  of  them,  I  let  you 
have  them,  and  they  begin  to  breed  and  return  to 
me  in  a  year's  time  with  added  sovereigns.  How 
can  this  be? 

Money  does  not  breed ;  the  wisest  of  men — Solo- 
mon, Aristotle,  Bacon  —  are  sure  of  that,  and  they 
are  convinced  that  I  have  come  by  the  extra 
sovereigns  wrongfully,  by  some  process  of  extor- 
tion. 

If  I  plead  that  you,  after  taking  my  sovereigns, 
circulated  them  in  commerce,  buying  goods  with 
them,  taking  these  goods  to  other  people  and  sell- 

227 


228       THE  ECONOMICS   OF  DISTRIBUTION. 

ing  them,  and  that  by  processes  of  this  kind  you 
obtained  a  considerable  increase  of  sovereigns  and 
had  some  over,  even  after  returning  my  original 
stock  with  increase,  the  above-named  worthies 
would  not  be  appeased.  For  just  as  I  had  made  no 
increase  of  sovereigns  by  lending  them  to  you,  so 
you  have  made  no  rightful  increase  by  circulating 
them  in  commerce.  If  I  plead  that  you  have 
not  been  a  loser,  then  you  must  have  used  my 
sovereigns  in  cheating  sovereigns  out  of  others. 
The  process  of  lending  money  could  give  no 
rightful  increase,  for  it  cost  me  nothing  to  lend 
my  idle  cash  to  you,  and  sovereigns  cannot  make 
anything,  but  only  pass  from  hand  to  hand. 

There  was  to  the  ancient  mind  no  ground  for 
payment  of  interest  upon  money  lent ;  ^  no  valu- 
able service  was  rendered,  whatever  origin  you 
give  to  value ;  there  was  no  apparent  cost  and  no 
apparent  utility.  Or  if  there  Avas  an  obvious 
utility,  if  I  lent  to  you  in  your  dire  necessity,  I 

1  It  seems,  however,  pretty  clear  that  in  Babylonia  as  in 
China,  and  probably  in  other  ancient  societies,  a  distinction  was 
early  made  between  loans  for  need  and  loans  for  business.  This 
reasonable  distinction  would  easily  make  itself  manifest  even  in 
the  most  primitive  forms  of  lending.  "Among  the  primitive 
progressive  peoples  who  cultivated  the  wild  wheat  of  Babylo- 
nia, we  may  feel  sure  that  the  primitive  instincts  of  hospitality 
never  sank  so  low,  as  for  one  man  to  ask  another  to  give  him 
back  with  interest,  the  corn  borrowed  and  eaten  in  a  day  of 
need.  But  the  case  is  quite  different  as  regards  corn  to  be 
used,  not  for  food  but  for  seed,  capable  of  bringing  forth  a  hun- 
dred fold."     (Simcox,  Primitive  Civilisation,  Vol.  I,  p.  194.) 


BARGAINS  FOR   THE   USE  OF  CAPITAL.      229 

was  able  to  trade  upon  3'oiir  weakness,  and  exact 
terms  which  were  cruel  and  inequitable.  There 
was  very  little  fixed  capital  used,  and  compara- 
tively little  lending  for  trade ;  most  loans  were 
made  by  the  rich  to  the  poor  to  purchase  for  the 
latter  current  necessaries  of  life.  Wherever  in- 
terest is  especially  associated  with  such  loans,  as 
in  Russia  to-day,  the  condemnation  alike  of  the 
theory  and  the  practice  of  interest  is  quite  intel- 
ligible. 

§  2.  But  even  when  we  come  to  the  conditions 
of  a  modern  industrial  community,  Avhere  loans 
are  quite  as  often  made  to  the  rich  as  to  the  poor, 
where  some  lenders  plainly  deprive  themselves  of 
certain  present  opportunities  of  satisfaction,  and 
where  it  is  quite  clearly  seen  that  what  is  bor- 
rowed is  not  really  money,  but  plant,  machinery, 
and  goods,  —  though  the  necessity  and  even  the 
abstract  justice  of  paying  interest  is  generally  ad- 
mitted, —  there  is  no  clear  apprehension  of  what 
it  is  that  is  really  bought  and  paid  for  by  interest. 

"  The  use  of  capital,"  it  has  been  said  ;  but 
that  answer  does  not  carry  us  far.  For  what  is 
that  use?  Capital  performs  a  service  in  produc- 
tion. Even  Karl  Marx  allows  that.  But  what 
service,  and  why  should  it  be  paid  in  interest? 
If  the  service  of  a  piece  of  capital,  (say)  a 
machine,  consists  in  helping  to  work  up  raw 
materials  into  finished  goods,  as  it  seems,  then 
this  machine  will  wear  itself  out  in  a  few  years, 


230       THE  ECONOMICS   OF  DISTRIBUTION. 

or,  if  one  prefers,  it  will  itself  be  worked  up  or 
consumed  in  the  goods  it  helps  to  produce.  Put 
it  on  a  par  with  the  labour  that  tends  it,  secure 
the  machine  against  its  wear  and  tear,  procure  for 
it  continuity  of  existence,  by  providing  against 
depreciation.  But  whence  comes  the  interest? 
You  say  "  it  is  productive,"  but  what  it  has  pro- 
duced is  clearl}^  the  goods  which  have  been  sold  : 
how  has  it  produced  the  interest  actually  paid  its 
owner,  who,  even  after  the  actual  machine  is  dead 
and  is  replaced  by  another  one,  continues  to  re- 
ceive this  interest  just  the  same? 

§  3.  Just  as  the  interest  does  not  clearly  seem 
to  correspond  to  any  productivity,  so  again  the 
cost  represented  by  its  use  is  not  so  patent  as  in 
the  case  of  labour.  Earlier  economists  of  this 
century,  including  Ricardo,  inclined  to  resolve  the 
"  cost "  incurred  by  capital  into  the  labour  of  mak- 
ing the  forms  of  capital.  But  this  treatment  of 
capital  as  accumulated  labour  gives  no  explanation 
and  no  justification  of  interest.  McCulloch's  asser- 
tion, ' '  that  profits  of  stock  are  only  another  name ' 
for  the  wages  of  accumulated  labour,"  is  simply  a 
denial  of  the  validity  of  interest.  Take  the  case  of 
the  earliest  form  of  capital,  which  we  may  assume 
to  be  entirely  made  by  labour.  If  the  labourers 
who  made  it  sold  it,  when  made,  in  a  free  market, 
we  should  be  obliged  to  say  they  obtained  its  full 
value  as  tlie  wages  of  tlieir  labour  ;  if,  on  the 
other  hand,  tliey  kept  possession  of  it,  and  either 


BARGAINS  FOR   THE   USE  OF  CAPITAL.      231 

used  it  to  assist  them  in  their  labour,  or  loaned  it 
to  others  for  a  similar  purpose,  at  the  end  of  the 
year  they  would  obtain  an  added  value  which  was, 
ex  hyjiothesi,  not  payment  for  the  original  labour 
which  went  into  making  it,  but  was  what  we  call 
interest.  In  such  a  simple  case  it  is  easy  to  per- 
ceive that,  not  the  labour-cost  of  making  it,  but 
some  cost  connected  with  the  use  of  it  either  by 
themselves  or  others  during  the  year,  was  the 
cause  why  interest  comes  to  them.  To  the  "some 
cost,"  Senior  gave  the  name  of  abstinence.  These 
men  received  the  extra  value  as  a  reward  for  their 
postponement  of  their  immediate  gratification. 
But  it  was  difficult  for  Senior  to  explain  how 
this  cost  of  abstinence  was  the  efficient  cause  of 
any  increase  of  wealth,  analogous  to  the  increase 
of  wealth  due  to  the  cost  of  an  output  of  labour- 
power.  "  How  could  mere  abstinence,  the  nega- 
tion of  activity,"  he  was  asked,  "  possibly  cause 
an  increase  of  wealth  which  went  as  interest  ?  "  and 
he  had  no  valid  answer. 

How  is  the  cost  of  abstinence  productive  ?  It 
is  quite  plain  that  the  taker  of  interest  need  do 
nothing  but  abstain ;  that  is,  in  fact,  the  onl}' 
"  cost "  he  undergoes.  This  was  perhaps  not 
clearly  seen  Avhen  most  capital  was  owned  by 
workers,  who  used  it  to  assist  their  labour.  But 
when  we  turn  to  the  normal  use  of  capital  for 
investment,  we  see  that  all  the  owner  need  do  to 
earn  the  interest  he  receives  is  to  abstain  from 


232       THE  ECONOMICS   OF  BISTBIBUTION. 

immediate  consumptioD,  to  postpone  satisfaction. 
How  can  this  negative  action  be  productive  of  the 
wealth  returned  as  interest  ? 

For  the  answer  to  this  question  (there  is  an 
answer),  we  must  turn  to  another  school  of  econo- 
mists, who  have,  I  think,  unconsciously  furnished 
a  clew  to  the  mystery. 

We  have  already  seen  the  trouble  caused  by  the 
antagonism  of  two  theories  of  Value  —  the  "cost" 
and  the  "utility"  theories.  I  have  shown  how, 
by  approaching  value  through  price,  we  reach  a 
true  statement  of  value  as  the  resultant  of  forces 
operating  from  both  sides,  the  relations  of  cost  to 
utility.  Now  it  is  worthy  of  remark  that  although 
the  question  of  capital  and  interest  has  commonly 
been  severed  from  the  general  theory  of  value  and 
submitted  to  separate  investigation,  the  same  di- 
vergency of  conflicting  explanations  has  arisen. 
One  set  of  thinkers  explains  interest  by  absti- 
nence —  a  cost  theory  ;  another  by  productivity 
—  a  utility  theory. 

It  is  not  curious  that  this  conflict  should  arise 
in  connection  with  an  imperfect  theory  of  value. 
It  is,  however,  of  the  utmost  importance  to  recog- 
nise that  the  question  of  interest  is  nothing  else 
than  a  particular  case  of  price. 

The  Law  of  Price  stated  above  applies  to  the 
price  of  service  of  capital  as  to  all  other  prices. 
The  loan  market  is  subject  to  the  same  forces 
which  determine  prices  in  other  markets ;    there 


BARGAINS  FOR   THE   USE  OF  CAPITAL.      233 

is  the  same  competition  of  bargaining  pairs,  the 
same  narrowing  of  the  competitive  price  toward  a 
point  finally  determined  by  the  will  of  the  stronger 
member  of  the  final  pair  ;  final  cost  and  final 
utility  are  represented  here  as  in  other  markets 
by  the  final  pair. 

The  final  pair  in  the  loan  market  will,  as  in 
other  markets,  consist  of  the  lender  who,  among 
those  who  conclude  a  loan,  sets  the  highest  valua- 
tion upon  the  services  he  is  selling,  and  the  bor- 
rower who,  among  actual  borrowers,  sets  the  lowest 
valuation  upon  the  service  he  is  buying.  The 
former,  in  accordance  with  our  general  analysis 
of  value,  will  be  the  marginal  saver  (the  person 
incuiTing  the  largest  "  cost,"  or  requiring  the 
largest  inducement  to  "abstain"  or  "wait"),  the 
latter  the  marginal  borrower  (the  person  who 
imputes  the  smallest  utility  to  a  loan). 

§  4.  But  the  root  questions  still  await  an  an- 
swer :  "  How  is  the  cost  of  abstinence  the  cause  of 
the  utility  of  capital  ?  "  "  What  is  the  '  utility ' 
of  a  concrete  piece  of  capital  which  yields  a  con- 
tinuous interest  to  its  owner  ?  " 

I  build  a  house,  let  it  to  you,  you  pay  me  <£80 
a  3"ear  and  undertake  to  keep  it  in  repair  at  a  cost 
of  ,£20  a  year.  You  are  paying  £100  a  year, 
£80  of  which  comes  to  me  as  rent  or  interest. 
What  does  that  interest  and  insurance  buy  for 
you  ?  Clearly  the  shelter  and  other  conveniences 
furnished  by  the  house.      May  we  not  say  that 


234       THE  ECONOMICS   OF  DISTRIBUTION. 

the  house  is  engaged  in  producing  a  continuous 
supply  of  shelter  ?  You  say  the  house  is  only 
dead  matter  and  cannot  produce.  This  begs 
the  question  that  conscious  human  effort  alone 
produces.  This  again  is  only  a  question  of  con- 
venience of  terminology.  I  suggest  that  it  is 
convenient  to  regard  both  land  and  capital  as 
productive  factors,  and  their  rent  and  interest 
as  analogous  to  wages.  Land  is  not  dead,  but 
yields  a  recurrent  supply  of  natural  forces  analo- 
gous to  the  recurrent  supply  of  labour-power  put 
forth  by  man,  and  upon  similar  conditions,  viz. 
that  she  is  recouped  artificially  or  is  allowed  to 
recoup  herself  for  the  drains  to  which  she  is  sub- 
jected. Is  it  altogether  fanciful  to  suggest  that 
the  repairs  done  to  the  house  correspond  to  the 
subsistence  wage  paid  to  labour  and  to  land  to 
maintain  their  continuous  economic  existence,  and 
that  the  interest  paid  the  owner  is  for  continuous 
services  rendered  by  the  natural  powers  of  the 
materials  of  which  the  house  is  constructed,  the 
powers  to  resist  rain,  atmospheric  influences,  and 
animal  intruders?  Do  not  these,  in  fact,  consti- 
tute the  utility  for  which  you  pay  ,£100  ? 

There  are  those  who  would  make  a  mystery  of 
the  fact  that  capital  can  yield  interest  in  perpe- 
tuity. "  A  house  or  a  machine  or  other  piece  of 
capital  is  not,"  they  say,  "  eternally  productive  ; 
even  allowing  it  is  productive  in  the  way  you 
claim,  it  wears  out  in  time,  and  yet  after  it  is 


BARGAINS  FOR    THE   USE  OF  CAPITAL.     235 

worn  out  and  gone  and  is  replaced  by  a  different 
house  or  machine  you  will  continue  to  receive  the 
interest  just  the  same." 

Yet  this  difficulty  disappears  if  we  look  more 
closely  at  our  example.  My  interest  on  my  house, 
the  rent  you  pay  me,  is  £80,  but  you  value  the 
utility  you  get  at  <£100,  for  you  are  willing  not 
only  to  pay  me  £80,  but  to  spend  £20  a  year 
in  repairs.  Now  this  arrangement  about  repairs 
is  not  inherent  to  the  theory  of  interest.  I  can 
arrange  that  you  shall  pay  me  £100  a  year  instead 
of  £80,  and  I  will  do  the  repairs  myself.  Now  in 
either  case  provision  is  made  that  my  capital,  my 
house,  is  eternally  productive.  The  £80  I  receive 
will  continue  indefinitely  as  the  payment  for  the 
shelter  furnished  by  my  house  ;  this  continuity  or 
preservation  I  furnish  myself  by  additional  labour 
put  into  repairs.  I  may  make  you  pay  for  these 
repairs,  but  none  the  less  they  are  to  be  deemed 
my  repairs,  for  the  house  is  worth  —  for  an  in- 
definite time  —  £100  to  you,  and  I  only  take 
£80  as  profit.  The  case  is  perhaps  still  clearer 
if  I  occupy  my  own  house,  enjoying  the  same 
shelter,  and  doing  the  repairs  with  my  own  hands. 
Here  it  matters  little  whether  I  speak  of  the  house 
as  capital  producing  a  profit  of  £100  or  regard 
£20  as  my  wages  for  current  repairs. 

Continuous  external  existence  of  capital  and 
interest  is  only  obtained  by  consenting  to  forego 
a  portion  of  a  higher  profit  which  could  be  taken 


236       THE  ECONOMICS   OF  DISTRIBUTION. 

for  a  limited  time.  This  interest  foregone  repre- 
sents a  continual  repair,  and  since  this  repair  can 
(in  theory  at  any  rate)  secure  eternity  for  the 
form  of  capital,  there  is  no  reason  why  the  price 
of  a  utility  which  still  continues  should  cease  to 
be  paid.i 

Or  take  the  case  of  a  machine.  If  wear  and 
tear  is  provided  for,  as  in  the  case  of  the  house, 
the  objection  against  perpetuity  of  interest,  on  the 
ground  that  the  machine  is  worked  up  in  a  limited 
time  into  a  given  quantity  of  goods,  falls  to  the 
ground.  This  machine  has  its  continuity  secured, 
and  it  has  a  yearly  productivity  consisting  of  the 
service  it  renders  by  cooperating  with  labour, 
which  brings  in  interest  to  its  owner.  This  pro- 
ductivity and  interest  will  not,  however,  disappear 
if,  instead  of  fully  providing  against  wear  and 
tear  of  this  particular  machine,  it  is  allowed  to 
wear  itself  out  and  is  replaced  by  another.  For 
it  cannot  matter  either  in  the  case  of  the  house  or 
the  machine  whether  the  X20,  which  measures  the 
yearly  contribution  to  depreciation,  is  put  into 
repairs  of  the  old  structure  or  the  gradual  provi- 
sion of  a  new  fabric  which  shall  take  its  place. 

1  Bohra-Bawerk  begs  the  whole  question  when  he  asserts 
(^Capital  and  Interest,  p.  249)  that  a  house  rented  is  "a  store 
of  energies  to  be  released  bit  by  bit."  Bohm-Bawerk  confuses 
the  "waste"  of  the  material  fabric  of  a  form  of  capital  with 
the  "use"  of  which  that  waste  is  one  among  other  conditions. 
'ITiat  waste  made  good,  as  it  is  made  good,  the  "use"  becomes 
perpetual. 


BARGAINS  FOE   THE   USE  OF  CAPITAL.      237 

The  continuous  existence  of  the  house  or  the 
machine  does  not  really  obscure  or  impair  our 
understanding  of  the  origin  or  the  legitimacy  of 
interest. 

If  the  owner  hired  out  the  machine,  he  could 
get  as  rent  or  interest,  say,  XlOO,  if  he  made  no 
stipulation  as  to  the  wear  and  tear ;  or  he  can 
let  it  at  £80,  on  the  understanding  that  it  shall 
be  kept  in  repair  or  replaced  when  worn  out. 
Some  people  let  out  machines  (^e.g.  bicycles)  upon 
the  former  terms,  others  on  the  latter ;  the  former 
yields  a  higher  interest  for  a  limited  time,  the 
latter  a  lower  interest  without  the  limit.  The 
eternity  of  the  capital  is  secured  by  what  may  be 
regarded  as  a  payment  out  of  gross  interest, 
which  accurately  corresponds  to  a  fund  for  main- 
tenance of  economic  efficiency  and  payment  of 
rent  and  wages  in  the  case  of  labour  and  of  land. 

In  order  that  labour  may  command  a  price  for 
its  use,  three  conditions  are  admittedly  essential  : 
first,  there  must  be  objective  or  technical  produc- 
tivity, an  actual  increase  of  "  goods  "  due  to  the  use 
of  the  labour  ;  secondly,  there  must  be  a  subjec- 
tive cost  or  painful  expenditure  of  effort ;  thirdly, 
there  must  be  a  subjective  utility  or  fund  of  en- 
joyment afforded  by  the  result  of  the  labour. 

All  three  conditions  we  have  shown  are  present 
in  the  case  of  the  functioning  of  forms  of  fixed 
capital.  A  house  or  a  machine  when  economi- 
cally used  gives  out  a  continuous  supply  of  objec- 


238       THE  ECONOMICS   OF  DISTRIBUTION. 

tive  economic  goods  to  which  value  is  attached, 
and  a  "  price  "  affixed  by  consideration  of  the  rela- 
tion between  the  marginal  "  cost ""  of  that  absti- 
nence which  is  essential  to  secure  their  economic 
existence,  and  that  marginal  "  utility  "  which  di- 
rectly measures  the  economic  importance  attached 
to  them  by  borrowers. 

The  case  of  fixed  capital  is  thus  plainly  seen  to 
be  on  all  fours  with  the  other  factors  of  produc- 
tion with  regard  to  the  conditions  of  value,  and 
the  determination  of  price. 

The  case  of  loans  which  take  shape  as  circulat- 
ing capital,  or  as  commodities  for  present  consump- 
tion, present  at  first  sight  a  somewhat  different 
aspect,  and  have  misled  many  economists  into 
adopting  a  special  explanation  of  value  and  price 
of  the  use  of  capital. 

Instead  of  taking  the  loan  of  a  house  or  a 
machine,  let  us  now  consider  the  loan  of  capital 
which  takes  shape  in  material  of  manufacture, 
fuel  for  generating  manufacturing  power,  or  goods 
which  form  the  stock  in  trade  of  a  business.  Do 
these  conform  to  the  same  conditions  as  fixed 
capital  ?  Do  they  possess,  as  capital,  continuous 
existence,  and  can  objective  net  productivity  be 
imputed  to  them  ?  At  first  sight  one  is  disposed 
to  give  a  negative  answer  to  both  these  questions. 
"  Circulating "  capital,  in  the  very  terms  of  its 
most  common  definitions,  ceases  to  exist  after  a 
single  use  ;  the  raw  cotton  once  spun  is  no  longer 


BARGAINS  FOR    THE   USE  OF  CAPITAL.      2313 

raw  cotton  but  yarn  ;  the  coal  once  burnt  ceases  to 
function  as  coal;  the  shop  goods  once  bought  by  a 
customer  now  only  possess  economic  existence  as 
consumptive  wealth.  But  this  superficial  view  dis- 
appears before  a  more  exact  conception  of  indus- 
trial order.  In  the  case  of  the  laboiu'er,  the  mere 
fact  that  the  material  fabric  of  his  body  is  con- 
tinuously worn  out  in  the  course  of  his  working 
life,  each  particle  of  tissue  being  wasted  and 
replaced  by  another  particle,  does  not  impair  our 
conception  of  the  identity  and  the  continuous 
existence  of  this  fund  of  labour-power.  In  the 
case  of  a  building  or  a  macliine  we  are  ready  to 
admit  that  the  conservation  of  its  identity  does 
not  depend  upon  the  fact  that  all  or  any  of  its 
original  material  structure  remains  intact ;  in  the 
long  course  of  wear  and  repair  every  particle  of 
the  original  house  or  machine  may  disappear,  and 
yet  we  rightly  recognise  the  continuous  existence 
of  the  capital  it  embodies.  Now  there  is  no  real 
or  essential  difference  in  this  respect  between 
fixed  and  circulating  capital  :  in  the  latter  case 
the  change  of  the  matter  which  represents  the 
capital  is  more  rapid  and  more  regular,  that  is  all. 
Just  as  a  loan  of  capital,  which  takes  shape  as 
a  machine  or  a  house,  is  kept  in  continuous 
economic  existence  by  replacement  and  repair  of 
wasted  matter,  so  in  the  case  of  the  capital  which 
takes  shape  as  coal  to  feed  an  engine  or  to  heat  a 
house.     In  the  case  of  the  latter  ;us  of  the  former, 


240       THE  ECONOMICS   OF  DISTRIBUTION. 

there  is  continuous  waste  (or  "  consumption "  if 
this  ambiguous  term  be  preferred),  and  continu- 
ous replacement :  the  particular  matter  which 
represents  the  capital  is  in  incessant  flux. 

This  is  the  true  explanation  of  the  mystery  which 
Bohm-Bawerk  affects  to  find  in  the  attribution  of 
"  continuous  use  "  to  perishable  goods.  "  It  had  to 
be  discovered  that  a  hundredweight  of  coal  can  be 
burnt  to  cinders  on  January  1,  1888,  and  yet  be 
'  used '  uninterruptedly  throughout  the  whole  year, 
and,  perhaps,  for  five,  ten,  or  a  hundred  years  to 
come;  and  what  is  best  of  all,  that  this  lasting 
use  can. always  be  bought  for  a  particular  price, 
although  and  after  the  coal  itself,  and  the  right  to 
consume  it  to  the  last  atom,  has  been  given  away 
for  another  and  a  different  price." ^  The  "fiction" 
which  Bohm-Bawerk  claims  to  be  the  animating 
principle  of  this  theory  is  only  a  "fiction"  if  con- 
tinuous existence  and  continuous  use  were  claimed 
for  the  same  material  embodiment  of  a  hundred- 
weight of  coal.  But  no  such  claim  is  preferred. 
The  economic  continuity  achieved  by  replacement 
shifts  the  "capital"  contained  in  the  hundred- 
weight of  coal  to  a  second,  and  a  third,  and  an  in- 
definite number  of  hundredweights  of  coal,  which 
are  the  legitimate  economic  representatives  and 
successors  of  tlie  first  liundred weight  and  may 
well  survive  for  ten  or  a  hundred  years.  So  long 
as  the  owner  of  the  original  luindredweight  of 

^  Positive  Theory,  p.  287. 


BARGAINS  FOR   THE   USE  OF  CAPITAL.      241 

coal  which  was  loaned  stands  out  of  his  property, 
his  abstention  is  a  legitimate  economic  cost,  which 
force  preserves  in  economic  existence  and  use  a 
hundredweight  of  coal  or  some  other  industrial 
rexDresentative  of  it. 

This  is  no  fiction,  but  an  important  fact,  the 
understanding  of  which  is  essential  to  a  compre- 
hension of  the  working  of  modern  industry.  A 
manufacturer  maintains  his  stock  of  raw  materials 
or  of  fuel  in  the  same  way  in  which  he  maintains 
his  fixed  capital,  though  his  mode  of  book-keep- 
ing may  suggest  a  difference.  Out  of  the  gross 
receipts  from  his  sales  he  replaces  the  one  as  he 
replaces  and  repairs  the  other.  Or  take  the  stock 
of  a  retail  store  which  does  a  regular  trade,  the 
same  quantity  of  the  same  kinds  of  wares  will 
constantly  be  there.  The  tobacconist's  furnisher 
who  supplies  on  credit  a  small  retail  store,  has 
precisely  the  same  claim  to  receive  continuous 
interest  for  that  part  of  the  capital  wliich  is  in 
cigars  and  pipes,  as  for  that  which  takes  the  shape 
of  shop  furniture  and  fixtures:  the  one  is  just  as 
permanent  as  the  other,  as  cigars  and  pipes  are 
sold  they  are  replaced  by  fresh  orders  just  as  the 
fittings  or  furniture  are  replaced  when  they  are 
damaged  or  worn  out.  The  claims  of  objective 
capital  to  continuity  of  existence  depends  not 
upon  continuity  of  substance,  but  of  economic 
form.  This  continuous  existence  of  so-called 
circulating  capital  also  implies  a  continuous  objec- 


242       THE  ECONOMICS   OF  DISTRIBUTION. 

tive  produGtivity  which  corresponds  to  that  which 
we  discerned  in  fixed  forms  of  capital.  As  a 
machine  continuously  working  is  continuously 
productive,  so  with  the  fuel  which  furnishes  its 
mechanical  energ}^:  when  we  recognise  that  the 
existence  of  the  fuel,  as  capital,  is  not  dependent 
on  the  permanence  of  any  particular  particles  of 
coal,  we  perceive  that  its  use  is  continuously  pro- 
ductive of  wealth,  taking  shape  in  the  goods  that 
are  manufactured  by  the  machine.  The  same 
must  be  said  of  the  raw  materials  themselves 
which,  by  the  operation  of  machinery,  are  taking 
serviceable  shapes ;  they,  too,  are  functioning 
productively  in  industry,  and  that  productivity 
is  continuous  so  long  as  the  supply  of  materials 
which  represents  that  form  of  circulating  capital 
is  maintained. 

Loans  of  commodities  for  which  interest  is  paid 
are  often  instanced  in  triumphant  refutation  of 
the  alleged  need  of  objective  productivity  of 
capital.  1  A  loan  of  corn  for  purposes  of  present 
food,  a  loan  of  wine  drunk  as  soon  as  it  is  bor- 
rowed—  these  things  may  form  sources  of  the 
payment  of  continuous  interest,  though  continuous 
existence  and  productivity  cannot  be  imputed  to 
them.  What  are  we  to  say  of  such  cases  ?  We 
do  not  need  to  evade  the  issue  by  urging,  as  Bohm- 
Bawerk,  who  raised  the  difficulty,  enables  us  to 

1  Cf.  Bobm-Bawerk,  Capital  and  Interest,  pp.  214-269. 


liARGAINS  FOB   THE   USE  OF  CAPITAL.      243 

do,  that  such  loans  are  not  loans  of  capital  ^  and 
that  what  is  paid  for  their  use  is  not  true  interest. 
The  fact  is  that,  if  the  corn  lent  is  used  to  sustain 
productive  energy  of  labourers,  so  as  to  enable 
them  to  produce  more  corn  and  out  of  this  pro- 
duce to  repay  capital  and  interest,  the  case  is  on 
all  fours  with  that  of  capital  which  functions  as 
fuel  or  as  raw  material,  though  it  may  for  con- 
venience be  best  to  exclude  consumptive  goods 
from  ranking  as  economic  capital ;  the  real  source 
and  justification  of  interest  is  identical  in  the  two 
cases. 

But  what  of  the  loan  of  wine  which  is  drunk 
as  soon  as  borrowed,  and  cannot  be  regarded 
as  "  consumed  productively  "  ?  Whence  comes 
the  continuous  interest  that  must  be  paid  for  this 
loan  so  long  as  it  remains  an  undischarged  debt  ? 
No  continuous  use  and  no  objective  productivity 
appears  here.  How,  then,  can  interest  arise  ? 
The  answer  is  that,  if  this  case  be  taken  by  itself, 
interest  cannot  arise  at  all,  and  the  fact  that  it 
cannot  be  paid  is  seen  to  rest  upon  the  non-pro- 
ductivity of  this  loan.  Bohm-Bawerk,  who  ad- 
duces this  instance  to  refute  the  supporters  of  use 
and  productivity  as  the  source  of  interest,  is  really 
hoist  with  his   own  petard,  for   he  cannot  show 

1  "Consumptive  goods  are  not  means  of  production;  they 
are  therefore  not  capital ;  and  the  advantages  which  they  con- 
fer do  not  proceed  from  any  productive  power  they  possess." 
{Positive  Theory  of  Capital,  p.  272.) 


244       THE  ECONOMICS   OF  DISTRIBUTION. 

in  such  a  case  that  the  interest  paid  for  the  drunk 
wine  arises  from  a  "  ripening  of  future  into  present 
goods"  as  his  theory  demands.  In  point  of  fact 
the  instance  is  invalid.  No  true  interest  can  be 
paid  for  such  a  loan ;  if  money  interest  is  paid,  it 
is  derived  from  the  productivity  of  some  other 
factor  of  production.  The  case  has  no  bearing 
whatever  on  the  theory  of  interest.  The  rent  of 
a  piece  of  land  must  be  paid  even  by  a  farmer  who 
is  losing  money,  but  we  cannot  on  such  a  ground 
deny  that  productivity  of  nature  is  a  necessary 
condition  of  payment  of  rent.  If  a  borrower  mis- 
applies his  capital,  or  converts  it  into  wasteful 
forms,  he  must  pay  that  rate  of  interest  which  is 
determined  by  the  condition  of  its  most  effective 
and  productive  economic  use.  If  apiece  of  capital 
is  squandered,  the  interest  must  be  paid  out  of  the 
productivity  of  some  other  piece  of  capital  or  some 
other  factor  of  production.  If  none  such  is  avail- 
able, cadit  quoestio,  the  interest  cannot  be  paid  at 
all. 

§  5.  I  have  found  it  necessary  to  dwell  at  length 
upon  this  matter  and  to  illustrate  from  the  several 
kinds  of  capital,  because  it  appears  to  be  thought 
by  many  that  modern  representatives  of  the  Aus- 
trian School,  Bohm-Bawerk  in  particular,  have 
destroyed  the  theory  which  would  rank  interest 
with  otlier  payments,  and  have  established  a  sepa- 
rate origin  and  nature  for  this  source  of  income. 
Bohm-Bawcrk  has,  at  the  close  of  his  "  Positive 


BARGAINS  FOR   THE   USE  OF  CAPITAL.      245 

Theory  of  Capital,"  i  challenged  economists  to 
prove  the  existence  of  an  "  '  enduring  '  use  of  per- 
ishable goods,  for  which  interest  is  supposed  to  be 
paid." 

I  claim,  here,  to  have  met  this  challenge  and  to 
establish  the  "  enduring  use "  and  the  enduring 
objective  productivity  of  the  various  forms  of 
capital  as  the  source  and  the  fundamental  condi- 
tion of  the  payment  of  interest.  By  showing  the 
economic  provision  for  continuous  replacement  of 
the  matter  in  which  a  stock  of  "  perishable  goods  " 
is  at  any  given  moment  embodied,  I  have  removed 
the  difficulty  which  beset  most  of  the  older  theo- 
ries of  dependence  of  interest  upon  productivity. ^ 

1  p.  295. 

2  Bohm-Bawerk,  in  dealing  with  the  arguments  by  which 
Knies  defends  the  view  that  interest  arises  from  a  durable  use 
in  perishable  goods,  attempts  to  turn  his  opponent's  position  by 
argumenta  ad  ridiculum  which  utterly  evade  the  issue.  Admit- 
ting (p.  289)  that  "in  a  certain  point  of  view  the  individual 
goods  replaced  may  be  looked  upon  as  if  they  were  actually  the 
same  individual  goods  which  were  given  away  in  the  loan  ;  they 
have  identically  the  same  effect  on  the  economical  position  of 
the  lender  who  receives  them,"  he  affects  to  deny  that  herein 
is  any  evidence  of  "continuous  use  "  or  "productivity."  One 
might,  he  thinks,  "as  well  use  the  identity  of  perishable  goods 
to  prove  that  oysters  will  keep  fresh  for  ten  years."  It  is,  he 
insists,  really  "a  question  which  must  find  its  answer  in  con- 
sidering the  nature  of  the  perishable  good  and  the  nature  of  the 
use."  But  "the  nature  of  the  use"  is  precisely  what  Bohm- 
Bawerk  does  not  consider.  Had  he  done  so  he  would  have 
perceived  that  the  "nature  of  the  use"  is  such  that  the  eco- 
nomic consumption  of  a  perishable  form  of  capital  replaces  it 


246        THE  ECONOMICS   OF  DISTRIBUTION. 

Interest  is  paid  out  of  an  increased  product 
whose  existence  requires  the  presence  and  ser- 
vices of  capital.  But  this  increased  product  does 
not  necessarily  constitute  interest,  nor  does  it  pro- 
vide a  measure  of  the  value  of  the  use  of  capital. 
A  new  machine  introduced  into  a  trade  might 
double  the  output,  but  of  course  it  by  no  means 
follows  that  the  profit  obtained  by  the  owner  of 
the  machine  corresponds  to  the  value  of  half  the 
increased  output,  still  less  to  the  value  of  the 
whole  of  the  earlier  output.  If  the  machine 
were  an  absolute  monopoly,  its  owner  could 
hold,  against  the  encroachments  of  labour  on 
the   one   hand   and   the    consumer   on   the  other 

by  another  form,  and  in  addition  yields  a  surplus  which  is 
destined  to  figure  as  interest.  This  suiplus  (a  net  Nutzung) 
arises  from  that  productivity  of  use  of  capital  which  Bohm- 
Bawerk  simply  denies,  but  the  non-existence  of  which  he  fails 
to  prove.  He  boldly  asserts  (p.  291)  in  following  up  Knies  that 
"  the  enjoyment  of  effects  indirectly  obtained  ivom  the  con- 
sumption of  goods  is  not  in  the  least  a  utility  which  we  get 
in  addition  to  the  consumption,  it  is  just  the  utility  we  get 
from  the  consumption,"  i.e.  the  consumption  of  a  ton  of  coal 
cannot  be  productive  in  the  sense  that  it  not  only  yields  a  value 
enabling  another  ton  of  coal  to  replace  it,  but  a  surplus  value 
which  figures  as  interest.  Whether  Knies  is  technically  right 
or  wrong  in  his  account  of  the  indirect  services  arising  from  this 
consumption,  we  have  seen  that  the  economic  consumption  of  a 
ton  does  yield  a  surplus  over  and  above  the  ton  which  shall 
replace  it.  Without  such  surplus  we  shall  presently  .see  there 
exists  no  objective  fund  for  payment  of  interest  which  is  thus 
thrown  back  upon  a  subjective  fund  that  is  impotent  to  explain 
real  interest. 


BARGAINS   FOR    THE   USE  OF  CAPITAL.      247 

hand,  the  whole  of  the  increased  product,  at  a 
value  only  lower  than  the  value  of  the  former 
output  by  such  fall  of  price  as  he  deemed  desir- 
able to  allow,  in  order  to  increase  the  sale  of 
goods  to  the  point  which  would  yield  the  maxi- 
mum aggregate  of  net  profits.  But  where  the 
machine  is  no  monopoly,  the  competition  of  other 
capitalists  may  oblige  him  to  hand  over  part  of 
the  increased  productivity  to  consumers  in  large 
reductions  of  price,  or  to  labour  in  much  higher 
wages,  receiving  only  a  minimum  profit  which  has 
no  fixed  or  directly  assignable  relation  to  the  in- 
creased productivity. 

§  6.  The  amount  of  the  profit  or  the  value  of 
this  use  of  capital  will,  according  to  utility  theo- 
rists, be  dependent,  not  upon  the  productivity  of 
each  separate  machine,  but  upon  the  subjective 
utility  imputed  to  the  "  marginal "  machine,  that 
which  is  least  effectively  applied. 

Needless  to  say,  I  reject  this  assertion  that  the 
price  and  value  of  the  use  of  capital  is  determined 
by  final  utility.  Utility  and  productivity  are 
essential  conditions  of  interest,  and  interest  may 
be  rightly  regarded  as  paid  out  of  increased  pro- 
ductivity ;  but  the  amount  or  proportion  of  the 
added  productivity  required  for  profit  is  not  to 
be  determined  by  confining  attention  to  the  util- 
ity of  capital.  1 

But  a  complete  presentment  of  interest  as  a 
1  This  is  Von  Wieser's  mistake  iu  Natural  Value. 


248       THE  ECONOMICS   OF  DISTRIBUTION. 

case  of  the  general  law  of  price  requires  not 
only  that  the  capital  shall  be  coordinated  with 
other  factors  of  production  in  relation  to  utility 
and  productivity,  but  also  in  relation  to  cost.  If 
the  use  of  capital  is  what  is  sold  and  paid  for  by 
interest,  how  are  we  to  describe  the  "  cost "  from 
which  a  price  proceeds  helping  to  determine  that 
price  ? 

§  7.  No  novel  answer  is  required.  Abstinence 
still  seems  to  me  the  best  term  to  describe  the 
human  effort  which  enables  capital  to  be  produc- 
tive. jSIisunderstanding  upon  this  theory  of  ab- 
stinence as  a  cost  arises  from  two  sources :  first, 
as  to  the  nature  of  the  abstinence ;  second,  as  to 
the  economic  position  of  those  who  practise  it. 

Upon  the  nature  of  abstinence  early  economists 
expressed  themselves  ambiguously.  The  absti- 
nence which  enables  capital  to  function  does  not 
consist  in  the  original  determination  which  leads 
a  saving  person  to  abstain  from  making  what  he 
can  enjoy  at  once,  in  order  to  make  something 
which  cannot  be  at  once  consumed,  but  which  is 
of  service  in  production.  That  initial  act  is  only 
the  beginning  of  the  effort  of  abstinence.  That 
effort,  or  "  cost,"  must  be  considered  to  be  going 
on  all  the  time  that  capital  is  utilized ;  the  owner 
of  this  capital  must  be  conceived  as  exercising 
a  self-restraint  which  enables  him  to  resist  the 
temptation  to  substitute  for  his  capital  a  fund  of 
present  enjoyment.     This  effort,  moreover,  need 


BARGAINS  FOR    THE   USE  OF  CAPITAL.      249 

not  be  regarded  as  a  purely  negative  action ;  the 
effort  of  self-restraint  is  as  positive  as  any  other 
effort,  and  indeed  has  its  psychical  and  physical 
measurements,  like  the  efforts  which  go  out  in 
present  labour-power.  This  effort  of  abstinence 
is  not,  indeed,  to  be  regarded  as  the  efhcient  cause 
of  the  productivity  of  capital ;  we  cannot  say  in 
so  many  words  that  abstinence  is  productive,  but 
this  continued  effort  is  plainly  to  be  regarded  as 
keeping  capital  in  continuous  economic  life.  If 
that  abstinence  fail  and  owners  demand  instant 
enjoyment,  capital  lapses,  and  its  services  are 
withdrawn.  Professor  Marshall,  I  think,  does 
wrong  to  compromise  the  view  by  substituting 
"waiting"  for  "abstinence."  The  human  sub- 
jective cost  is  the  self-restraint  implied  by  absti- 
nence ;  the  self-restraint  as  a  psychical  process 
involves  waiting,  and  waiting  is  but  the  imme- 
diate condition  which  enables  capital  to  operate 
productively. 

Precisely  the  same  relation  exists  between  ab- 
stinence and  the  utility  of  capital  which  exists 
between  labour  and  the  utility  of  commodities. 
Philosophically,  abstinence  is  to  be  regarded  as  a 
form  of  human  economic  "  cost  "  referable  to  some 
common  denominator  with  labour-power,  and  paid 
for  its  sacrifice  upon  the  same  scale.  Interest 
from  this  point  of  view  must  be  regarded  as  a 
wage  of  abstinence.  Abstinence  must  be  regarded 
as  a  form  of  painful  effort  voluntarily  incurred  by 


250      THE    ECONOMICS    OF   DISTRIBUTION. 

individuals,  paid  for  in  interest  out  of  a  product 
which  owes  its  existence  to  the  incurring  of  the 
effort. 

To  some  this  is  a  "  hard  saying,"  which  they 
seek  to  deny,  either  by  pointing  to  a  possible 
order  of  society  in  which  individuals  would  not 
be  called  upon  to  practise  abstinence,  or  by  allu- 
sions to  the  Duke  of  Westminster  and  others 
whose  abstinence  involves  no  effort,  but  consists 
in  a  refusal  to  incur  the  positive  discomfort  of 
increasing  their  consumption  after  all  felt  wants 
are  fully  satisfied. 

But  neither  of  these  objections  is  really  sub- 
stantial. The  substitution  of  collective  for  indi- 
vidual saving  would  not  really  do  away  with 
abstinence  or  even  with  the  painful  cost  of  it;  it 
would  always  be  more  pleasant,  and  perhaps  more 
immediately  profitable,  to  a  society  to  convert  an 
undue  proportion  of  its  energy  into  immediately 
consumable  goods,  and  so  to  make  inadequate  pro- 
vision for  the  future.  A  rational  society  resisting 
the  temptation  and  making  due  provision  for 
future  production  must  be  held  to  practise  absti- 
nence and  self-sacrifice  analogous  to  that  practised 
by  the  individual  now.  In  the  administration  of 
such  a  collectivist  society,  no  particular  portion 
of  the  increased  wealth  due  to  this  provision 
might  be  classed  as  interest;  the  need  of  the  old 
tcrniiuology  might  have  passed,  but  the  thing 
itself,  the  "  interest,"  would  be  there. 


BARGAINS  FOR   THE   USE  OF  CAPITAL.       251 

So  also,  under  an  individualist  dispensation,  as 
long  as  the  abstinence  or  postponement  of  gratifi- 
cation on  the  part  of  any  of  those  required  to 
contribute  to  the  supply  of  capital  involves  a  sac- 
rifice, interest  must  remain.  If,  as  some  suppose, 
a  time  might  come  when  a  sufficient  number  of 
savers  might  consent  to  abstain  in  order  to  con- 
sume more  serviceably  in  the  future  the  same 
quantity  or  even  a  less  quantity  of  goods,  interest 
in  any  positive  shape  might  indeed  be  abolished ; 
for  if  abstinence  involved  no  painful  effort,  how- 
ever much  it  might  be  serviceable  in  producing 
wealth,  it  would  receive  no  pay ;  it  would  be 
among  the  bounties  of  nature  which  have  no 
value.  ^ 

The  fact  that  the  Duke  of  Westminster  suffers 
no  painful  effort  in  saving,  of  course  is  beside  the 
point  for  all  who  have  considered  that  waiting, 
like  all  other  "  costs,"  must  be  measured  from  the 
marginal  saver,  and  not  from  the  saver  whose 
saving  comes  easiest.  A  large,  an  unduly  large, 
proportion  of  saving  is  performed  by  those  whose 
abstinence  involves  no  pain  or  appreciable  loss  of 
present  enjoyment.  Even  the  self-restraint  of  the 
ordinary  well-to-do  saver  may  not  greatly  reduce 
his  current  rate  of  enjoyment.  But  the  total  sup- 
ply of  capital  employed  in  industry  certainly  con- 

1  Subjective  interest  even  then  would  not  disappear.  For  a 
discussion  of  tlie  question,  "Is  objective  interest  necessary  ?" 
see  Appendix  at  tlie  close  of  this  chapter. 


252       THE  ECONOMICS  OF  DISTRIBUTION. 

tains  some  portions  which  are  the  result  of  a  real 
considerable  sacrifice  of  present  comfort.  Not 
only  the  superfluous  income  of  the  Duke  of  West- 
minster, but  some  of  the  hard-won  earnings  of 
John  Smith  of  Oldham,  are  required  to  contribute 
to  the  aggregate  supply  of  capital.  Now,  while 
the  Duke  might,  and  probably  would,  consent  to 
do  his  saving  even  if  no  interest  was  paid  for  its 
use,  John  Smith  probably  would  not  consent.  So 
long  as  John  Smith  must  receive  2^%  in  order 
to  evoke  the  genuine  effort  of  abstinence,  the 
Duke  must  get  the  same  payment  for  his  formal 
abstinence.  It  is  economically  necessary  to  pay 
the  Duke  at  the  same  rate  at  which  we  pay  Jolin 
Smith,  because,  in  the  investment  market,  as  in 
any  other  market,  there  can  only  be  one  price 
for  the  whole  supply,  that  price  measuring  either 
the  cost  of  producing  that  portion  of  supply  which 
is  produced  most  expensively,  or  the  utility  af- 
forded by  that  portion  of  supply.  The  relation 
between  the  cost  of  production  to  John  Smith,  and 
the  utility  of  the  portion  of  capital  which  he  fur- 
nishes, determines  the  rate  of  profit.  If  it  seems 
unjust  that  the  Duke  of  Westminster  should  be 
paid  for  no  actual  effort  or  sacrifice  incurred,  we 
must  bear  in  mind  two  facts.  First,  our  analysis  of 
the  operation  of  bargaining  has  shown  that  the 
distribution  of  gain  in  a  bargain  is  not  based  on 
any  moral  principle  of  distributive  justice.  The 
injustice  apparent  in  the  payment  of  interest  is 


BARGAINS  FOR   THE  USE  OF  CAPITAL.      253 

also  found  in  the  payment  of  wages.  A  strong- 
bodied  labourer,  who  finds  his  work  easy  to  per- 
form, is  paid  as  much  as  a  weak-limbed  labourer 
who  gives  out  a  far  more  painful  effort  in  the 
performance  of  the  same  task.  The  first  hour 
of  the  working  day,  which  may  be  nothing  else 
than  a  pleasurable  exercise,  is  paid  for  at  the  same 
rate  as  the  last  hour,  which  is  exhausting  and 
injurious.  So  with  saving,  the  effort  of  the  mar- 
ginal saver,  not  of  the  other  savers,  is  the  deter- 
minant of  profit  from  the  cost  side  of  the  equation. 
§  8.  "  But,"  it  may  be  further  pressed,  "  the 
analogy  with  labour  is  not  complete,  the  labourer 
whose  labour  is  easiest  at  any  rate  gives  out  some 
personal  exertion;  but  the  capitalist  whose  sav- 
ings are  only  the  self -accumulation  of  excessive  in- 
come does  nothing  at  all."  Now  this  statement  is 
indisputable,  but  the  attack  it  suggests  is  misdi- 
rected when  it  is  applied  to  impugn  the  principle 
of  interest.  The  real  gravamen  of  the  charge, 
against  those  whose  interest  is  unattended  by  any 
"  cost "  of  abstinence,  has  reference,  not  to  the 
payment  of  interest,  but  to  the  modes  by  which 
they  have  come  into  possession  of  the  capital.  In 
other  words,  the  frequent  assertion  that  "  the  real 
abstinence  is  of  the  worker  and  not  of  the  capi- 
talist," does  not  meet  the  point  at  issue.  Sup- 
posing it  be  true  that  the  capitalist  steals  from  the 
worker  a  portion  of  the  product  and  uses  it  for 
capital,  receiving  interest  for  its  use,  a  true  bill  of 


254       THE  ECONOMICS   OF  DISTRIBUTION. 

indictment  against  him  would  rest,  not  upon  the 
wrongful  receipt  of  interest,  but  upon  the  prior 
act  of  stealing  the  product  of  labour.  If  the  in- 
justice of  paying  interest  to  those  who  have  earned 
it  by  no  effort  be  admitted,  that  injustice  has  no 
special  reference  to  bargains  for  the  use  of  capital, 
but  must  be  located  chiefly  in  prior  bargains  for 
the  sale  of  labour-power,  or  in  other  bargains 
where  the  capitalist  enjoys  a  superior  power  of 
bargaining.  Those  who  hold  that  capitalist  em- 
ployers forcibly  extort  from  their  workers  a  sur- 
plus value,  weaken  their  case  when  they  enter  a 
specific  attack  against  the  payment  of  interest  for 
this  surplus  value  after  it  has  taken  the  form  of 
capital. 

The  economic  necessity  of  interest  and  the  law 
of  its  payment  is  not  really  affected  by  the  fact 
that  some  of  the  capital  for  which  interest  is 
received  may  have  come  wrongfully  into  posses- 
sion of  its  owners. 

§  9.  I  claim  by  this  argument  to  have  shown 
that  the  price  of  the  use  of  capital,  called  interest, 
is  determined  in  the  same  way  as  the  price  of  a 
commodity  in  a  market,  i.e.  by  the  establishment 
of  a  relation  between  two  bargainers,  one  repre- 
senting final  or  marginal  cost,  the  other  final  or 
marginal  utility.  Abstinence  and  productivity 
must  be  admitted  each  to  contribute  toward  de- 
termining ilio  economic  importance  attached  to 
the  use  of  a  piece  of  capital. 


BARGAINS  FOE    THE    USE  OF  CAPITAL.      255 

§  10.  According  to  this  treatment,  interest,  the 
price  of  capital-use,  is  determined  like  every  other 
market-price.  There  are,  however,  certain  rea- 
sons, other  than  those  already  named,  which  have 
helped  to  remove  the  consideration  of  interest 
from  the  general  treatment  of  prices,  and  to  apply 
to  its  determination  special  laws  and  special  ter- 
minology. Both  economists  and  moralists  have 
treated  interest  as  a  payment  distinct  in  kind  from 
other  payments.  And  it  must  be  admitted  that 
certain  conditions  which  apply  to  capital  seem  to 
sever  it  naturally  from  other  articles,  the  use  of 
which  is  bought  and  sold. 

In  the  first  place,  until  quite  recent  times  in  all 
countries,  and  even  now  in  all  save  the  most  de- 
veloped countries,  most  loans  of  capital  were  not 
for  industrial  purposes,  but  for  consumption  or 
for  some  pressing  temporary  emergency.  The 
conditions  of  such  loans  have  generally  been  far 
removed  from  market  competition  of  the  kind 
with  which  we  have  been  dealing.  The  negotia- 
tions of  the  money-lender  with  his  client  give  to 
the  element  of  force  or  monopoly  power  a  far 
larger  place  than  is  commonly  accorded  in  bargain- 
ing. The  practice  of  usury  has  thus  been  strongly 
dissociated  from  ordinary  dealings,  and  still  yields, 
even  in  advanced  industrial  communities,  the  most 
striking  instances  of  forced  gains  in  the  deter- 
mination of  a  price.  The  lender  has,  from  tlie 
very  nature  of  the  case,  so  powerful  an  advantage 


256       THE  ECONOMICS   OF  DISTRIBUTION. 

over  the  borrower,  tliat  both  economics  and  ethics 
have  been  habituated  to  treat  such  bargains  as  a 
thing  apart.  But  though  the  balance  is  commonly 
so  ill-adjusted  for  these  bargains,  they  are  not 
intrinsically  different  from  other  bargains  where 
competition  among  sellers  is  closely  restricted. 

Again,  when  we  turn  to  industrial  capital,  we 
find  that  in  most  countries  the  great  bulk  of  this 
capital  is  used  by  its  owners,  and  its  profit  is  not 
reckoned  apart  from  the  wages  or  the  earnings  of 
management  of  a  worker  or  an  employer.  The 
proportion  of  savings  which  have  been  used  for 
investment  outside  the  business  of  the  owner  has 
been  quite  small  until  recent  times,  and  many  such 
investments  are  determined  by  other  than  purely 
competitive  conditions. 

Thus  the  conception  of  a  fluid-market  for  the 
investment  of  money  in  which  two-sided  competi- 
tion exists,  and  where  the  lender  cannot  be  deemed 
to  have  any  natural  advantage  over  the  borrower, 
is  of  quite  modern  growth,  and  has  not  yet  dis- 
placed the  conception  of  capital  and  interest  asso- 
ciated with  the  old  order  of  things. 

But  in  so  far  as  the  use  of  capital  is  the  object 
of  a  sale,  whether  on  the  older  terms  of  usury  or 
in  modern  investments,  the  price  is  determined, 
like  the  price  of  commodities,  by  the  bargainers, 
who  represent  final  cost  and  final  utility :  the 
supply  of  the  use  of  a  particular  form  of  capital  is 
subject  to  the  same  laws  determining  its  increase 


APPENDIX  TO   CHAPTER    VIII.  257 

or  decrease  as  the  supply  of  laud,  or  of  labour,  or 
of  goods. 

APPENDIX  TO  CHAPTER  VIII, 

Is  Objective  Interest  Necessary  ? 

There  are  those  who  think  that  even  at  the  present 
time  objective  interest  is  unnecessary  as  a  stimulus  to 
saving,  or,  in  other  words,  that  there  is  no  economic 
cost  in  saving  which  requires  a  reward  represented  by 
an  objective  increase  in  the  quantity  of  goods  returned 
by  the  borrower.  According  to  these  thinkers,  inter- 
est is  maintained  by  the  option  which  an  investor  has 
of  buying  land  and  drawing  rent  (H.  George),  or  by 
the  further  option  of  getting  hold  of  a  limited  and 
legalised  ''  monopoly,"  money,  and  extorting  usury  for 
its  loan  (M.  Flurscheim).  If  land  and  money  were 
removed  from  the  field  of  investment,  interest,  they 
maintain,  would  disappear.  Those  who  hold  this  view 
seem  to  me  to  weaken  their  case  by  limiting  to  land- 
owning and  money-lending  the  forms  of  investment 
which  support  a  positive  interest.  All  other  industries 
which,  by  reason  of  the  enjoyment  of  legal  protection, 
dependence  upon  land-use,  or  restricted  competition, 
due  to  purely  economic  forces,  are  enabled  to  tax  the 
consuming  public,  will,  in  as  far  as  they  are  open  to 
investment,  stand  in  the  same  position  to  support  in- 
terest as  land  and  money.  But  if  these  forms  of 
protected  industry  wore  withdrawn  from  the  field  of 
private  investment,  would  interest  disappear,  or,  in 
other  words,  would  the  marginal  saver  lend  without  a 
larger  return  ? 


258       TUE   ECONOMICS   OF  DISTRIBUTION. 

No  direct  or  general  answer  can  be  given.  The 
question  of  the  influence  of  reduced  interest  on  saving 
is  often  discussed  as  if  the  motives  of  the  saver  were 
the  only  determinant.  This  is  not  so.  The  relation 
of  the  motives  of  the  saver  to  the  amount  of  savings 
socially  required  is  the  problem.  It  is  a  particular 
case  of  "  value,"  involving,  as  does  every  other  case, 
consideration  of  the  relation  of  marginal  cost  to  mar- 
ginal utility. 

Saving  is  due  (1)  partly  to  the  self-accumulation  of 
surplus  incomes  not  needed  to  satisfy  any  demand  for 
current  satisfaction.  A  fall  of  interest,  even  to  zero, 
or  below,  might  not  appreciably  affect  this  saving; 
(2)  partly  to  a  desire  to  provide  against  old  age,  or 
other  infirmities,  or  to  support  a  family.  Saving 
for  such  purposes  is  probably  stimulated  by  a  fall 
of  interest.  If  it  is  intended  to  expend  the  capi- 
tal sum  of  the  savings  for  these  purposes,  the  rate 
of  interest  will  not  have  an  important  influence  as 
motive,  but  so  far  as  it  operates,  a  high  rate  will  check 
saving  by  enabling  a  somewhat  smaller  amount  of  sav- 
ing, accumulating  at  interest,  to  achieve  the  desired 
result.  If,  on  the  other  hand,  it  is  intended  to  make 
provision,  not  by  expending  the  capital,  but  by  using 
the  income  from  that  capital,  a  low  rate  of  interest  is 
likely  to  evoke  more  saving  because  a  larger  capital 
will  be  required  to  yield  the  necessary  income. 
Against  this,  however,  must  bo  set  the  consideration 
that,  if  interest  is  so  low  that  tlie  task  of  accumulating 
by  saving  sufficient  capital  to  furnish  it  becomes  too 
difficult,  or  quite  impossible,  such  saving  will  not  be 
undertaken.    But  when  wc  remember  how  much  saving 


APPENDIX   TO   CHAPTER    VIII.  259 

is  often  done  in  primitive  industrial  societies  for  these 
purposes,  and  how  much  more  would  be  done  if  politi- 
cal and  social  conditions  were  such  as  to  protect  these 
savings  effectively,  we  shall  be  inclined  to  conclude 
that  a  fall  of  interest  is  more  likely  to  increase  than 
to  reduce  the  aggregate  of  savings  for  purposes  of 
definite  future  expenditure. 

(3)  Savings  are  made  by  men  of  substance  engaged 
in  industry,  in  order  to  extend  their  business,  or  gener- 
ally to  improve  their  financial  position.  In  such  cases 
it  is  reasonable  to  hold  that  a  high  rate  of  interest  will 
stimulate  saving.  For,  in  the  first  place,  the  interest 
upon  capital,  already  in  existence,  must  be  regarded 
as  the  poition  of  income  out  of  which  the  largest  pro- 
portion of  savings  can  be  most  easily  made.  Where 
interest  is  high,  the  proportion  of  the  general  income, 
which  admits  easily  of  saving,  will  be  large.  In  spite 
of  the  maxim  "lightly  earned,  lightly  spent,"  it  is 
reasonable  to  expect  that  a  rise  in  the  aggregate  of 
interest,  or  of  any  portion  of  income  not  earned  by 
direct  labour,  will  be  attended  by  an  increase  of  sav- 
ing. When  a  temporary  rise  of  interest  takes  place 
during  some  industrial  boom,  most  careful  business 
men  will  try  to  reap  a  golden  harvest  while  they 
can,  by  using  their  abnormally  high  profits  to  extend 
their  businesses.  A  temporary,  and  even  a  normal  and 
gradual,  fall  of  interest  will  reduce  this  sort  of 
saving. 

Most  economists,^  admitting  the  contrariety  of  mo- 

1  This  was  not  true  of  early  economists,  cf.  Webb,  Indus- 
trial Democracy,  Vol.  II,  p.  (522,  etc.  j\Ir.  ami  Mrs.  Webb, 
however,  are  wrong  in  their  interpretation  of  the  view  of  Senior 


260       THE  EC0y03IICS  OF  DISTRIBUTION. 

tives,  incline  to  the  belief  that  on  the  whole  a  fall  of 
interest  checks  saving.     But  is  this  true  ? 

If  the  Duke  of  Westminster,  who  saves  because  he 
has  a  superfluous  income,  would  save  no  less  if  interest 
fell,  while  John  Smith  of  Oldham,  who  saves  in  order 
to  provide  against  a  rainy  day,  might  save  more,  is 
it  certain  that  those  who  save  with  the  more  general 
object  of  making  money  would  so  far  reduce  their 
savings  as  to  bring  dowTi  the  aggregate  savings  of  a 
community  below  what  was  needed  to  furnish  the 
industrial  capital  required  to  maintain  current  con- 
sumption, and  to  provide  against  increased  consump- 
tion in  the  future  ? 

Is  it  not  possible  that  the  automatic  saving  of  sur- 
plus elements  of  income,  and  such  other  saving  as 
was  stimulated  by  a  fall  of  interest,  would  suffice  to 
furnish  the  socially  necessary  capital ;  in  other  words, 
that  the  marginal  saver  might  consent  to  save  without 
positive  interest?  It  is  at  least  conceivable.  Much 
would  depend  upon  (a)  the  absolute  amount  of  income, 
(b)  the  distribution  of  wealth,  (c)  the  condition  of  the 
industrial  arts,  and  (d)  the  nature  of  consumption. 
(a)  Where  the  income  of  the  community  is  large,  a 
relatively  large  portion  of  this  income  may  be  taken 
to  be  applicable  to  the  satisfaction  of  Aveaker  or  less 
urgent  current  desires.  This  portion  of  the  income 
of  an  individual  or  a  class  may,  it  is  generally  ad- 
mitted, be  saved  at  a  low  rate  of  interest.  It  is  not 
80  readily  admitted  that  it  may  be  saved  at  zero  or 
minus  interest.     Professor  Marshall  writes  as  if  some 

and  McCulloch.  fCf.  N.  Senior,  Pol.  Econ.  5th  ed.,  p.  140, 
and  McCulloch,  Pnl.  Econ.,  Pt.  I,  Ch.  II,  §  3.) 


APPENDIX  TO   CHAPTER    VIII.  261 

objective  interest  were  essential  because  "the  future 
pleasure  to  be  got  in  return  for  giving  up  a  present 
one  could  not  be  expected  to  be  greater  than  it,  but 
rather  to  be  less"  (IV,  Ch.  VII,  par.  8).  But  this 
is  by  no  means  true  in  cases  where  the  present  pleas- 
ure given  up  is  a  little-valued  luxury,  and  the  future 
pleasure  placed  in  its  stead  is  a  necessary  or  an 
important  comfort.  Professor  Marshall  here  does  not 
exhibit  the  essentially  subjective  character  of  the 
problem.  A  person  who  has  just  eaten  a  loaf  will 
consent  to  postpone  the  consumption  of  a  second  loaf 
which  he  has  in  his  possession,  on  condition  that  a 
loaf  or  even  less  is  given  back  to  him  at  a  future  time 
when  he  has  no  bread.  For  although  the  utility  as  a 
future  one  is  discounted,  the  satisfaction  of  the  future 
consumption  of  a  necessary,  when  discounted,  will  be 
greater  than  the  present  satisfaction  of  consuming  a 
superfluity.  Tliis  is  why,  even  in  uneducated  com- 
munities, money  and  treasure  are  laid  up  in  a  stock- 
ing. If  a  man  found  that  he  had  ten  years  to  live, 
and  that  his  income,  £1000  for  the  first  year,  would 
be  £900  for  the  second,  £800  for  the  third,  and  so 
on,  he  would,  assuming  his  capacity  of  enjoyment  and 
his  tastes  to  be  steady,  save  at  zero  interest  some  of 
his  higher  income  in  the  earlier  years  when  it  would 
have  been  spent  in  luxuries,  in  order  to  spend  it  in 
comforts  during  the  later  years.  He  would  not  abso- 
lutely equalise  his  expenditure  over  the  period,  for 
such  a  course  would  imply  that  he  did  not  discount 
future  pleasures.  The  truth  is,  that,  though  he  values 
a  present  comfort  higher  than  a  similar  future  com- 
fort, he  values  a  future  comfort  higher  than  a  present 


262       THE  ECONOMICS   OF  DISTRIBUTION. 

luxury.  It  is  evident  from  such  a  case  that  not  merely 
a  zero  but  a  negative  objective  interest  is  possible, 
because  it  is  consistent  with  a  positive  interest  which 
forms  the  human  motive  of  saving. 

(6)  The  amount  and  the  proportion  of  a  community's 
income  which  would  be  saved  from  such  a  motive  at 
zero  interest  or  less  would  probably  depend  upon  the 
distribution  of  wealth,  though  it  is  not  easy  to  assign 
any  general  law  for  the  influence  of  distribution  upon 
saving.  At  first  sight,  it  would  appear  as  if  inequality 
favoured  saving,  since  it  would  set  a  larger  total  income 
free  for  the  purchase  of  superfluities  or  such  luxuries 
as  had  but  a  small  hold  upon  the  desires  of  consumers ; 
in  other  words,  a  larger  proportion  of  the  income  of 
the  rich  might  transcend  their  standard  of  comfort 
and  accumulate  as  savings.  But  further  reflection 
makes  this  position  doubtful;  for  though  the  exist- 
ence of  a  rich  class  may  thus  lead  to  the  saving  which 
consists  in  self-accumulation  of  superfluous  income, 
equality  of  income  would  seem  to  favour  deliberate 
saving  for  old  age  and  other  emergencies.  For  in  so 
far  as  large  incomes  are  drawn  from  the  rent  of  land 
or  profits  on  investments,  such  incomes  do  not  lapse 
with  old  age  or  personal  inability,  and  there  is  little 
need  for  such  a  man  to  provide  against  special  emer- 
gencies. On  the  other  hand,  in  a  working  comnumity, 
where  an  approximate  equality  of  incomes  existed,  the 
largest  proportion  of  the  people  would  be  both  enabled 
and  inclined  to  save.  For  the  maintenance  of  a  sound 
standard  of  comfort  for  themselves  throughout  life 
and  for  their  family  will  involve  an  abstinence  from 
present  luxuries  for  the  sake  of  future  necessaries  or 


APPENDIX  TO   CHAPTER    VIII.  263 

prime  comforts  —  that  kind  of  saving  which,  as  we 
have  seen,  least  requires  an  objective  interest. 

The  total  subjective  interest  of  saving  is  greater 
when  the  saving  is  applied  to  the  future  provision  of 
necessaries,  smallest  when  it  is  applied  to  the  future 
provision  of  luxuries.  Therefore  the  aggregate  sub- 
jective interest  attending  a  given  amount  of  saving 
would  be  greater  where  a  larger  proportion  of  it  was 
done  by  poorer  persons  than  where  a  smaller  propor- 
tion was  theirs.  Thus  it  would  appear  that  motived 
saving  should  be  larger  where  distribution  was  more 
equal.  How  far  this  would  be  offset  by  the  larger 
unmotived  saving  of  a  wealthy  class  is  of  course 
doubtful. 

(o)  AVhether  the  quantity  of  saving  which  can  be 
induced  without  objective  interest  will  suffice  must, 
however,  largely  depend  upon  the  character  of  the 
industry  that  is  practised,  or,  in  other  words,  upon 
the  relative  importance  of  capital  as  compared  with 
the  other  factors  of  production.  In  a  simple  commu- 
nity, where  abundant  material  wealth  might  be  drawn 
by  simple  processes  from  rich  natural  resources,  the 
requisite  amount  of  capital  might  be  evoked  -without 
interest ;  whereas  in  a  country  with  highly  developed 
machine-production,  the  same  quantity  of  wealth  might 
require  a  much  larger  capital,  some  part  of  which  would 
not  be  brought  into  economic  existence  without  objec- 
tive interest. 

(d)  The  importance  of  capital  as  compared  with  other 
factors  is  not,  however,  merely  a  question  of  the  devel- 
opment of  the  productive  arts,  though  it  is  sometimes 
assumed  that  as  civilisation  advances,  capitalism  and 


264       THE  ECONOMICS  OF  DISTRIBUTION. 

machine-production  must  occupy  a  part  of  ever  grow- 
ing prominence.  Much  will  depend  upon  the  char- 
acter of  a  progressive  nation  as  expressed  in  modes 
of  consumption.  A  nation,  which  is  dominated  by  a 
constant  craving  for  increased  quantities  of  certain 
common  forms  of  material  goods,  will  indeed  assign 
an  ever  increasing  relative  importance  to  machine- 
processes  and  will  exercise  a  correspondingly  in- 
creased demand  for  saving  to  be  stored  in  material 
forms  of  capital.  A  nation,  on  the  other  hand,  whose 
consumption,  beyond  a  certain  standard  of  common 
material  consumption,  grows  more  qualitative  and 
demands  the  satisfaction  of  the  taste  and  special 
needs  of  its  individual  members,  while  it  employs  an 
ever  larger  proportion  of  its  income  in  demand  for 
intellectual  goods,  personal  services,  and  other  non- 
material  forms  of  wealth,  may  assign  a  place  of  rela- 
tively diminishing  importance  to  material  capital,  so 
that  the  requisite  saving  might  be  done  by  those  who 
do  not  require  the  incentive  of  objective  interest. 

The  problem  is  a  highly  speculative  one,  and  no 
adequate  data  exist  for  attempting  a  solution,  but  the 
considerations  above  stated  entitle  us  to  question  the 
generally  accepted  view  that  the  marginal  saving 
always  requires  the  stimulus  of  objective  interest. 
In  a  truly  progressive  society,  where  growing  fore- 
sight and  precaution  reduce  the  discount  of  future 
utilities,  Avhere  increased  equalisation  of  incomes  en- 
ables a  larger  proportion  of  members  to  lay  aside  for 
definite  future  uses,  and  where  a  coordinate  improve- 
ment in  the  arts  of  production  and  consumption  enables 
the  production  of  routine  material  goods  to  be  more 


APPENDIX  TO   CHAPTER    VIII.  265 

easily  achieved,  and  consequently  a  larger  proportion 
of  purchasing  power  to  be  directed  to  the  demand  for 
consumables  which  lie  outside  of  capitalist  industry, 
it  is  quite  conceivable,  perhaps  even  probable,  that 
the  requisite  amount  of  saving  could  be  induced  by 
the  stimulus  of  subjective  interest  alone. 

The  question  whether  private  saving  can  be  evoked 
in  sufficient  quantity  without  objective  interest  has 
too  often  been  discussed  with  exclusive  attention  to 
the  "  cost "  side,  the  motives  which  actuate  savers ; 
the  influences  operative  upon  demand  are  often  ig- 
nored. But  the  economic  importance  or  value  of  the 
marginal  capital  will  be  equally  affected  by  forces 
proceeding  from  both  sides,  as  is  the  case  in  any 
other  market. 


CHAPTER   IX. 

BOHM-BAWERK'S    POSITIVE    THEORY  OF   CAPITAL. 

§  1.  The  coordination  of  capital  with  nature 
and  labour  as  a  factor  of  production,  and  of  inter- 
est with  rent  and  wages  as  a  price  of  a  use  of  a 
factor  of  production,  differs  so  widely  from  a 
recent  theory  of  interest  which  has  gained  much 
acceptance  among  economists,  that  it  seems  only 
fair  that  I  should  make  a  formal  investigation  of 
that  theory  and  set  forth  the  grounds  for  denying 
its  validity. 

My  rejection  of  the  one-sided  interpretation  of 
the  general  phenomena  of  value  and  price  pressed 
by  disciples  of  the  "marginal  utility"  school, 
would  necessarily  involve  a  rejection  of  a  theory 
of  interest  which  claims  to  be  an  application  of 
that  same  theory  of  value.  The  "  Positive  Theory 
of  Capital,"  however,  if  it  were  merely  an  appli- 
cation of  the  marginal  utility  theory  of  value 
to  capital,  treated  as  a  productive  factor  along 
with  nature  and  labour,  would  require  no  separate 
consideration  ;  its  strength  and  weakness  would 
be  merely  those  of  the  general  theory. 

266 


POSITIVE  THEORY  OF  CAPITAL.  2G7 

But  the  theory  most  closely  associated  with  the 
name  of  Bohm-Bawerk,  by  refusing  at  the  outset 
the  position  of  a  productive  agent  to  capital,  in- 
volves an  application  of  "  marginal  utility  "  which 
differs  widely  in  its  results  from  its  application 
in  the  case  of  labour  and  nature.  The  "  sub- 
jective" elements  in  determination  of  value  and 
price  will  be  found  to  be  accorded  a  part  essen- 
tially different  from  and  more  important  than 
that  accorded  them  in  other  cases  of  value  and 
price. 

§  2.  It  will  be  best  to  begin  by  a  short  presen- 
tation of  the  cases  by  which  Bohm-Bawerk  un- 
folds his  theory  in  his  work,  the  "  Positive  Theory 
of  Capital." 

The  simplest  case  is  that  of  A,  the  owner  of 
.£100,  who,  instead  of  using  it  now  to  buy  con- 
sumption goods,  lends  it  to  B,  with  the  view  of 
receiving  it  again  in  a  year's  time  and  then  using 
it  to  buy  consumption  goods.  XlOO  regarded  in 
terms  of  present  consumption  goods  is  more  highly 
esteemed  than  <£100  in  terms  of  consumption  goods 
a  year  hence.  Look  at  XlOO  worth  of  goods  a 
year  off  —  they  look  smaller.  They  look  perhaps 
only  as  large  as  <£96  worth  of  present  goods. 
Yet  as  tlie  year  passes  to  its  close  this  quantity  of 
utility  esteemed  at  X96  rises  to  the  full  XlOO. 
Thus  the  lapse  of  time,  bringing  future  into 
present  goods,  appears  as  a  natural  source  of  in- 
terest, estimated  in  this  case  at  nearly  X4.     In- 


268       THE  ECONOMICS   OF  DISTRIBUTION. 

terest  arises  because  £100  in  our  hands  now  is 
not  the  same  as  XlOO  regarded  a  year  hence. 

So  again  the  owner  of  a  house  or  other  durable 
form  of  capital  possesses  "a  sum  of  future  vises 
discounted  according  to  their  futurity"  (XII). 
Productive  goods  (i.e.  raw  material  of  manufac- 
ture, machinery,  land)  are  endowed  at  the  begin- 
ning of  the  year  with  a  value  imputed  from  the 
utility  of  the  consumption  goods  they  are  going 
to  make ;  but  since  these  goods  are  not  existing 
at  the  beginning  of  the  year,  their  value  is  dis- 
counted in  our  estimate  of  the  machiner}^,  etc. 
During  the  year  "  future  goods  "  ripen  into  "  pres- 
ent goods,"  and  their  increased  value  recoups  the 
original  expenditure  on  capital  and  yields  an 
interest. 

Take  the  case  of  a  machine  thus  endowed  with 
a  six  years'  life.  At  the  opening  of  the  first  year, 
the  first  year's  utility  is  reckoned  at  100.  But 
the  total  utility  of  the  machine  does  not  stand  at 
600,  because  its  utility  for  the  subsequent  years 
is  estimated  lower  than  for  the  first  year.  Let 
the  discount  for  the  second  year  be  5%  on  the 
estimate  of  the  first  year,  and  let  the  same  rate 
of  discount  be  applicable  to  each  following  year. 
Then  the  total  utility  viewed  from  the  beginning 
of  the  first  year  will  be  100  +  95.23+00.70 
+  86.38  +  82.27  +  78.35  =  532.93. 

At  the  beginning  of  the  second  year,  each  year's 
valuation    according  to  the  first   year's  estimate 


POSITIVE  THEORY  OF  CAPITAL.  269 

will  have  moved  one  step  forward ;  the  second 
year  upon  last  year's  estimate,  which  was  worth 
95.23,  has  now  become  the  first  year  and  is  worth 
100  ;  similarly  with  each  succeeding  year. 

The  total  utility  at  the  beginning  of  the  second 
year  wiU  therefore  be  100  +  95.22  +  90.70  +  86.38 
+  82.27=454.58.  In  other  words,  the  valuation 
of  the  sixth  year  is  knocked  out,  there  being  now 
no  sixth  year.  At  the  beginning  of  the  third 
year  a  similar  forward  movement  of  each  year's 
value  takes  place,  the  former  fifth  year  having 
disappeared.  The  total  utility  is  now  100  +  95.22 
+  90.70  +  86.3  =  372.31.  Similarly  in  the  three 
succeeding  years,  while  he  enjoys  a  cui-rent  utility 
of  100,  the  estimate  of  the  total  utility  of  the 
machine  is  reduced  by  a  less  amount. 

In  other  words,  during  the  first  year  he  has 
realised  a  service  worth  100,  but  taking  stock  at 
the  end  finds  he  has  lost  only  78.35,  because  the 
value  represented  by  all  the  remaining  years  has 
advanced. 

At  the  beginning  of  the  fifth  year  he  has  left 
100  +  95. 23,  during  the  year  he  gets  a  service 
worth  100,  but  at  the  end  finds  he  still  possesses 
100,  and  so  has  only  lost  95.23. 

For  simplicity,  a  definite  life  has  been  here 
assigned  to  the  machine,  and  so  the  amount  of 
what  may  be  called  "gross  interest"  is  different 
in  the  different  years.  If,  however,  a  perpetuity 
of  life  be  secured  for  the  machine,  by  means  of  a 


270        THE  ECONOMICS   OF  DISTRIBUTION. 

fund  for  depreciation,  it  will  easily  appear  that, 
while  the  sum  of  the  series  of  valuations  now 
reaches  infinity,  the  net  interest  for  each  year  will 
be  the  same. 

In  Bohm-Bawerk's  words,  "  The  cause  of  net 
interest "  is  "  an  increase  of  value  of  the  future 
services,  which  were  previously  of  less  value,  but 
during  the  period  of  the  goods'  use  have  pressed 
forward  into  or  toward  the  present."^ 

§  3.  This  brief  statement  embodies  the  essence 
of  Bohm-Bawerk's  teaching  set  forth  at  length  in 
his  work,  the  "Positive  Theory  of  Capital."  His 
chief  points  of  divergence  from  the  treatment 
given  in  the  last  chapter  may  be  stated  in  three 
propositions,  which  I  will  first  explain  and  after- 
ward discuss. 

1.  Interest  is  not  the  price  of  the  use  of  caj)ital, 
but  the  price  of  the  purchase  of  present  goods  in 
terms  of  future  goods.^  The  underlying  fact  is 
this,  that  "present  goods  are,  as  a  rule,  worth 
more  than  future  goods  of  like  kind  and  number  " 
because,  other  tilings  equal,  present  satisfaction  is 
valued  higher  than  future  satisfaction.  A  man 
who  has  not  present  goods  may  buy  them  from 
another  man  who  has  them,  but  he  must  pay  for 
them  in  a  larger  quantity  of  future  goods.  If  the 
loan  is  of  money,  "  the  borrower  will  purchase  the 

^  Positive  Theory  of  Capital,  p.  346. 
3  pp.  285,  286.     Introduction,  p.  xx. 


POSITIVE   THEOliY  OF  CAPITAL.  271 

money  which  he  receives  now  by  a  larger  sum  of 
money  which  he  gives  Later.  He  must  thus  pay 
an  'agio'  or  prsemium,  and  this  'agio'  is  interest. 
Interest  then  comes  in  the  most  direct  waj'-,  from 
the  difference  in  value  between  present  and  future 
goods."  1  What  is  sold,  i.e.  present  goods,  forms 
the  subject  of  a  single  act  of  purchase,  though  the 
future  goods  paid  for  it  are  usually  paid  in  instal- 
ments at  regular  intervals  over  a  term  of  time. 
The  annual  interest,  together  with  the  principal 
repaid  at  the  end  of  the  term  of  borrowing,  forms 
the  single  price  of  the  present  goods. 

2.  Bohm-Bawerk  denies  that  the  objective  or 
"  technical "  producti\dty  of  capital  is  essential 
to  the  emergence  of  interest:  the  subjective 
"  productivity  "  which  consists  in  the  ripening  of 
future  into  present  goods  is  deemed  sufficient  to 
provide  a  fund  for  the  payment  of  interest. 

In  the  elaboration  of  his  "  Positive  Theory," 
Bohm-Bawerk  has  given  so  much  space  and  skill 
to  proving  and  illustrating  the  nature  of  the 
technical  productivity  of  capitalism  that  it  is 
likely  that  many  of  his  readers  do  not  clearly 
understand  that  his  technical  productivity  is  not 
essential  to  his  theory  of  interest.  The  most 
serviceable  portion  of  his  work  consists  in  the 
analysis  and  explanation  of  the  processes  of 
"roundabout  production"  with  the  object  of  prov- 
ing the  technical  productivity  of  these  processes. 

1  p.  281. 


272       THE  ECONOMICS   OF  DISTRIBUTION. 

This  objective  productivity  —  the  increased  quan- 
tity of  forms  of  wealth  due  to  "roundabout" 
methods  —  is  both  an  incentive  and  a  reward  of 
saving.  It  is  one  reason  for  postponing  present 
consumption  that  you  are  thereby  enabled  to  have 
more  goods  to  consume  in  the  future. 

But  from  the  examples  we  have  given  above, 
and  from  the  express  statements  of  Bohm-Bawerk 
himself,  it  is  made  manifest  that  interest  does  not 
depend  upon  or  require  such  objective  produc- 
tivity. The  one  essential  feature,  according  to 
his  teaching,  is  the  undervaluation  of  future  as 
compared  with  present  goods.  Objective  or  tech- 
nical productivity  is  only  one  factor  of  this  under- 
valuation, and  it  is  not  indispensable.  There  are 
three  factors  of  this  undervaluation,  each  of  which 
is,  according  to  Bohm-Bawerk,  by  itself  sufficient 
cause  for  a  difference  in  the  value  of  present  and 
future  goods,  and  an  adequate  reason  why  interest 
should  be  paid.  These  factors  are  "  the  difference 
in  the  circumstances  of  provision  between  present 
and  future,  the  underestimate  due  to  perspective, 
and,  finally,  the  greater  fruitfulness  of  lengthy 
methods  of  production."  ^ 

§  4.  The  first  factor  has  reference  to  the  real 
services  or  satisfaction  whicli  the  same  goods 
would  yield  now  as  compared  with  what  they 
would  yield  at  some  future  time,  and  is  con- 
cerned with  comparative  capacity  of  enjoyment 
^  Positive  Theory,  p.  272. 


POSITIVE   THEORY  OF  CAPITAL.  273 

and  comparative  wealth  at  the  two  periods.  The 
secoDd  refers  to  the  rate  at  which  the  same  amount 
of  real  services  will  be  discounted  by  forethought 
or  intelligence.  The  third  factor  corresponds  to 
what  is  generally  called  "productivity  of  capi- 
tal." It  is,  however,  right  to  record  the  fact  that 
Bohm-Bawerk  j)ersistently  repudiates  the  expres- 
sion "  productivity  of  capital "  and  refuses  to 
identif}^  with  it  the  factor  which  he  denominates 
"the  greater  fruitfulness  of  lengthy  methods  of 
production."  The  significance  of  this  "greater 
fruitfulness "  of  capitalism  consists,  according  to 
him,  in  "  the  technical  superiority  of  present 
goods "  rather  than  in  the  greater  quantity  of 
products  which  arises  from  the  productive  use 
of  "present  goods."  The  chapter  in  which  this 
"  technical  superiority  of  present  goods "  is  un- 
folded is  the  most  difficult  portion  of  his  treat- 
ment, not  from  any  obscurity  in  the  texture  of 
the  reasoning,  but  from  the  perversity  with  which 
he  labours  to  assign  to  time  the  productive  power 
commonly  attributed  to  capital.  He  proposes  at 
the  outset  to  substitute  for  "  productivity  of  capi- 
tal" what  he  terms  "the  facts."  "These  facts 
are  as  follows  :  that,  as  a  rule,  present  goods  are, 
on  technical  grounds,  preferable  instruments  for 
the  satisfaction  of  human  wants,  and  assure  us, 
therefore,  a  higher  marginal  utility  than  future 
goods."  ^     From  the  elaborate  explanation  which 

1  p.  260. 


274       THE  ECONOMICS   OF  DISTRIBUTION. 

follows,  this  sentence  appears  to  mean  that  a  given 
quantity  of  forms  of  capital  or  other  productive 
means  in  our  possession  now  is  superior  both  in 
marginal  utility  and  in  value  to  the  same  quan- 
tity to  be  possessed  a  year  hence,  because  the 
productivity  of  long-period  production  begins 
earlier  and  is  represented  at  any  given  time  in 
the  future  by  a  larger  quantity  of  goods.  This,  of 
course,  is  quite  consistent  with  the  ordinary  view 
of  productivity  of  capital ;  capital  which  begins 
now  to  be  applied  productively  will  be  repre- 
sented by  a  larger  amount  and  a  larger  aggregate 
value  of  goods  in  five  years'  time  than  the  same 
amount  of  capital  which  only  begins  to  function 
one  year  hence.  The  difference,  however,  be- 
tween Bohm-Bawerk  and  the  ordinary  "produc- 
tivity "  economist  is,  that  the  former  seems  to 
insist  that  the  increased  quantity  of  goods  and 
of  value  is  due  to  a  priority  of  time  and  not  to 
a  productive  use  of  the  material  forms  of  capital. 
To  this  issue  I  shall  presently  return.  It  is  here, 
however,  enough  to  point  out  that  the  third  factor 
to  which  Bohm-Bawerk  alludes  is  virtually  a  pro- 
ductivity of  capital,  though  his  ox})lanation  of 
"  the  greater  productiveness  of  lengthy  methods 
of  production "  assigns  the  el'ficient  causality  to 
the  length  of  time  rather  than  to  the  "  use  "  or 
the  "  productive  consumption "  of  the  forms  of 
capital.  However  we  explain  it,  this  third  factor 
does  yield  an  objective  fund  of  wcallli  from  which 


POSITIVE  TUEOIiY  OF  CAPITAL.  275 

objective  interest  can  be  paid.  If,  then,  this  third 
factor  were  essential  to  all  functioning  of  capital 
and  all  payment  of  interest,  Bohm-Bawerk's  theory 
would  at  any  rate  contain  an  objective  fund  of 
productivity.  But  he  denies  explicitly  that  this 
third  faculty  is  essential,  for  he  affirms  that  "  each 
of  the  three  factors,  independently  of  the  others, 
is  adequate  to  account  for  a  difference  in  value 
between  present  and  future  goods  in  favour  of 
the  former ;  "  ^  and  this  undervaluation  of  future 
goods  is  continually  put  forward  as  the  essence 
of  the  problem  of  interest.  In  other  words,  the 
change  in  human  subjective  valuations,  which 
takes  place  when  the  passage  of  time  ripens  future 
goods  into  present  goods,  is  assigned  as  in  itself  a 
sufficient  explanation  of  the  payment  of  a  sum  of 
objective  goods  in  interest. 

That  Bohm-Bawerk  does  not  deem  the  produc- 
tive use  of  capital  to  be  essential  to  the  emergence 
of  interest  is  further  attested  by  his  treatment 
of  saving  and  abstinence.  Of  "saving,"  he  says 
that  "  it  has  its  place,  not  among  the  means  of 
production,  but  among  the  motives  of  production 
—  the  motives  which  decide  the  direction  of  pro- 
duction." 2  Now,  if  our  reasoning  in  the  last  chap- 
ter is  correct,  we  have  shown  that  saving  not  only 
determines  the  direction  but  the  amount  of  pro- 
duction, in  that  it  enables  an  increased  productive 
power  to  function  in  industry.  This  denial  of  sav- 
1  p.  273.  2  p.  123. 


276       THE  ECONOMICS   OF  DISTBIBUTION. 

ing  as  a  means  of  production  is  implicitly  and 
necessarily  a  denial  of  the  productivity  of  capital. 
The  plainest  denial  of  the  productivity  of  capi- 
tal, however,  is  conveyed  in  Chapter  III  where, 
putting  the  question  "whether  capital  is  a  third 
and  independent  '  factor  of  production '  alongside 
of  labour  and  nature,"  he  says  "the  answer  must  be 
a  most  distinct  negative."^  "Capital  has,  first,  a 
symptomatic  importance.  Its  presence  is  always 
the  symptom  of  a  profitable  roundabout  produc- 
tion. I  say,  deliberately,  'symptom,'  and  not 
'  cause '  or  '  condition '  of  profitable  methods  of 
production  ;  for  as  a  fact,  its  presence  is  rather 
the  result  than  the  cause.  "'^  From  the  context  it 
is  evident  this  means  not  merely  that  some  pro- 
duction can  be  carried  on  without  capital,  and  that 
in  this  sense  capital  cannot  rank  on  an  equality 
with  nature  and  labour,  but  that  in  so-called 
"  capitalist  production  "  capital  is  not  a  factor  or 
cause  of  production.  A  certain  sort  of  "productiv- 
ity "  is  admitted  of  capital.  "  It  is  first '  productive ' 
because  it  finds  its  destination  in  the  production 
of  goods  ;  it  is  further  productive  because  it  is  an 
effectual  tool  in  completing  the  roundabout  and 
profitable  methods  of  production  once  they  are 
entered  on;  finally,  it  is  productive  indirectly 
because  it  makes  the  adoption  of  new  and  profit- 
able methods  possible."^  But  it  is  not  an  "inde- 
pendent factor  of  production  "  along  with  nature 
1  p,  05.  2  p.  92.  8  p.  99. 


POSITIVE  THEORY  OF  CAPITAL.  277 

and  labour,  but  only  "  the  medium  through  which 
the  two  original  productive  powers  exert  their 
instrumentality." 

§  5.  It  is  not  easy  to  deal  with  the  mixed 
thought  embodied  in  these  judgments.  It  is 
true  that  capital  cannot  operate  as  an  "  indepen- 
dent factor,"  but  neither  can  nature  or  labour  ;  it 
is  true  that  these  two  latter  factors  have  a  claim 
to  be  deemed  '■  original "  in  a  sense  to  which  capi- 
tal cannot  lay  claim,  but  for  all  that,  as  soon  as 
capital  exists  and  functions  as  an  integral  part  of 
a  more  productive  method,  it  is  possible  and  per- 
haps even  necessary  to  treat  it  as  a  joint  cause,  or 
at  any  rate  "condition,"  of  the  increased  produc- 
tivity. It  is  of  course  possible  to  force  language 
so  as  to  insist  that  capital  is  only  a  "  tool "  by  the 
use  of  which  the  two  original  powers,  nature  and 
labour,  attain  greater  productivity,  and  to  attrib- 
ute the  whole  of  this  increased  productivity 
either  to  labour  and  nature,  as  Bohm-Bawerk 
appears  to  do,  or  to  labour  alone,  as  socialism, 
following  early  English  economists,  does,  or  to 
nature  alone  as  did  the  physiocrats.  But  nothing 
is  gained  by  drawing  such  hairbreadth  distinc- 
tions between  a  cause  and  a  condition,  a  condition 
and  a  tool.  If  it  is  convenient,  as  it  is  generally 
admitted  to  be,  to  separate  capital  from  labour  and 
nature  in  tracing  the  organic  operations  of  in- 
dustry, and  if,  moreover,  capital  is  admitted  to  be 
necessary  to  the  operation  of  the  more  productive 


278        THE  ECONOMICS    OF  DISTRIBUTION. 

methods,  no  object  is  served  by  denying  direct  pro- 
ductivity to  capital ;  the  question  whether  it  is  an 
"  independent "  factor  is  entirely  beside  the  point. 

The  description  of  the  actual  place  filled  by 
capital,  which  Bohm-Bawerk  gives  here  and  else- 
where, amply  justifies  and  even  requires  the  attri- 
bution of  direct  productivity  to  it,  and  so  provides 
a  fund  for  the  payment  of  real  interest  correspond- 
ing to  the  fund  which  the  admitted  productivity 
of  nature  and  labour  furnishes  for  the  payment 
of  rent  and  wages.  There  is,  of  course,  neither 
"  independent  productivity "  nor  an  independent 
product,  for  the  organic  nature  of  cooperation  of 
the  factors  renders  this  impossible.  But  the  ac- 
count of  the  actual  functioning  of  forms  of  capital 
given  by  Bohm-Bawerk  does  not  justify  him  in 
placing  capital  on  any  different  footing  from 
nature  and  labour  in  a  theory  of  distribution. 

§  6.  But  while  Bohm-Bawerk,  as  we  see, 
admits  that  capital  as  an  instrument  does  assist 
to  increase  objective  productivity,  he  denies  that 
such  objective  productivity  is  essential  to  explain 
the  payment  of  interest.  The  "  subjective  pro- 
ductivity," the  ripening  of  future  into  present 
goods  by  the  passage  of  time,  is  deemed  a  sufficient 
source  of  interest.  Thus,  time  itself  is  given  as  a 
sufficient  explanation  of  the  origin  and  payment 
of  interest. 

Professor  Smart  puts  tliis  in  unmistakable 
terms  :   "  The  simplest  case  of  interest  is  that  in 


POSITIVE   TUEORY   OF  CAPITAL.  279 

which  it  appears  in  the  loan  for  consumption. 
Here  we  have  a  real  and  true  exchange  of  a  smaller 
sum  of  present  money  or  present  goods  for  a 
larger  amount  of  future  money  or  goods.  The 
sum  returned  principal  plus  interest  is  the 
market  valuation  and  equivalent  of  the  principal 
lent.  The  apparent  difference  in  value  is  simply 
due  to  our  forgetting  that  <£100  in  our  hands 
now  is  not  the  same  thing  as  <£100  a  year  hence. 
This  agio  on  present  goods  is  interest.  In  other 
words,  interest  is  a  complementary  part  of  the 
price  —  a  part  equivalent  of  the  principal  lent. 
Apart  altogether  from  an  organised  sj'^stem  of 
production  this  agio  would  emerge,  and  has 
emerged,  as  something  claimed  by  the  saving 
from  the  unthrifty."  ^ 

§  7.  This  passage  summarising  the  extreme 
claim  of  Bohm-Bawerk's  theory  will  serve  to  bring 
home  to  our  minds  its  deficiencies.  M}*  first 
criticism  is  that  a  theory  which  explains  interest 
by  the  rise  of  subjective  valuation  taking  place 
when  future  goods  become  present  goods,  is  inade- 
quate, because  it  provides  no  fund  for  the  pay- 
ment of  real  or  objective  interest.  I  have  already 
shown  that  the  instance  of  a  loan  of  consumption 
goods  to  an  unthrifty  person  shirks  the  issue,  be- 
cause either  the  payment  of  interest  is  impossible 
or  it  proceeds  from  the  abnormal  productivity  of 
some  other  factor  :  such  payment  is  no  more  a 
1  Preface  to  Positive  Theory,  p.  xi. 


280       THE  ECONOMICS   OF  DISTRIBUTION. 

case  of  normal  interest  than  the  advance  obtained 
by  a  farmer  to  pay  "  rent "  which  his  land  has  not 
justified,  is  a  normal  instance  of  rent.  An  "  agio  " 
of  the  kind  Professor  Smart  describes,  a  mere  rise 
of  subjective  valuation,  cannot  of  itself  explain 
how  a  quantity  of  goods  with  an  objective  ex- 
change value  is  paid  as  interest.  A  change  of 
estimate  cannot  of  itself  be  capable  of  yielding  an 
increase  of  objectively  measured  values.  The  un- 
dervaluation of  a  future  as  compared  with  a  pres- 
ent satisfaction  provides  in  itself  no  economic 
means  of  enlarging  the  objective  source  of  the 
future  satisfaction  when  it  comes.  The  lapse  of 
time  cannot  be  held  to  cause  forms  of  capital  to 
breed  or  grow  so  as  to  furnish  an  increased  num- 
ber for  future  enjoyment.  Yet  it  is  evident  that 
this  objective  interest  is  what  we  require  to  ex- 
plain. If  I  lend  goods  represented  by  100  pieces 
and  receive  back  at  the  end  of  the  year  goods  rep- 
resented by  105,  no  change  of  subjective  valuation 
will  account  for  the  existence  of  the  extra  5. 
Neither  the  lapse  of  time  nor  my  change  of  view 
will  explain  this  origin.  They  must  arise  from 
some  industrial  power  to  which  the  term  "pro- 
ductivity" may  be  given.  Since  it  is  admitted 
that  the  service  of  capital  as  a  tool  is  to  lengthen 
the  processes  of  production,  and  that  "every 
lengthening  of  the  process  is  accompanied  by  a 
further  increase  of  the  technical  result,"  ^  in  other 
ip.  84. 


POSITIVE   THEORY  OF  CAPITAL.  281 

words  that  "every  extension  of  the  productive 
process  leads  to  some  surplus  result,"^  it  is 
surely  wise  to  regard  this  surplus  result  as  the 
true  source  of  objective  interest.  We  have  here 
an  objective  productivity  as  a  basis  of  interest. 
If  Bohm-Bawerk  and  Professor  Smart  had  con- 
fined their  view  to  these  cases  of  loans  of  capital 
for  productive  purposes,  they  could  at  any  rate 
have  supported  the  theory  of  "Undervaluation"  of 
Future  Goods  as  the  source  of  "interest"  by  falling 
back  upon  an  objective  product  which  should  fur- 
nish the  goods  to  pay  this  interest.  But  the 
hardihood  of  these  instances  in  which  this  objec- 
tive productivity  is  directly  and  purposely  ex- 
cluded invalidates  this  theory.  Referring  to 
Professor  Smart's  statement,  I  cannot  for  one 
moment  admit  that  "  apart  altogether  from  an 
organised  system  of  production  this  agio  would 
emerge."  If  there  were  no  organised  system  of 
production,  the  subjective  undervaluation  of  future 
goods  by  a  lender  would  in  no  wise  enable  him  to 
receive  any  material  representative  of  this  "  agio  " 
in  interest.  Bohm-Bawerk's  theory  of  production 
does  not  require  him  to  dispense  with  this  "  sur- 
plus product "  of  long-period  production,  and  by 
doing  so  he  wrecks  his  theory.  In  a  word,  the 
problem  which  appears  to  Bohm-Bawerk  an  es- 
sentially "  subjective "  one  is  also  objective. 
Bolun-Bawerk  and  Professor  Smart  think  that 
1  p.  86. 


282        THE  ECONOMICS   OF  DISTRIBUTION. 

they  have  only  to  prove  an  emergence  of  subjec- 
tive values,  whereas  they  must  prove  an  emergence 
of  objective  values,  or,  other  things  equal,  an 
increase  of  products.  Treatment  of  the  problem 
of  loans  in  terms  of  money  sometimes  enables 
them  to  evade  this  fact.  The  simple  essential 
setting  of  the  problem  of  interest  is  not  that  of  a 
loan  of  XlOO,  but  the  case  where  A  lends  B  a  saw 
and  receives  back  a  saw  plus  a  plank.  Required 
to  explain  the  existence  and  payment  of  the  plank. 
§  8.  The  truth  seems  to  be  that  the  part  played 
by  time,  and  its  treatment  as  a  sort  of  agent  of 
production  of  value,  is  altogether  misconceived  by 
Bohm-Bawerk.  In  his  treatment  of  what  he 
terms,  in  a  phrase  which  itself  begs  the  question, 
"the  technical  superiority  of  present  goods," 
he  asserts,  "  It  is  an  elementary  fact  of  experi- 
ence that  methods  of  production  which  take  time 
are  more  productive.  That  is  to  say,  given  the 
same  quantity  of  productive  instruments,  the 
lengthier  the  productive  method  employed, 
the  greater  the  quantity  of  productivity  that  can 
be  obtained."^  Here  he  would  make  it  appear 
tliat  the  lengthiness  of  method  is  the  cause  of  pro- 
ductivity. He  affects  to  have  proved  this,  but  lie 
has  done  no  sucli  thing.  He  has  only  proved  that 
time  or  "  lengthiness "  is  one  condition  of  those 
roun(lal)out  processes  which  are  technically  more 
productive. 

1  p.  260. 


POSITIVE   TUEORY  OF  CAPITAL.  288 

The  effort  to  attribute  to  lapse  of  time  a  causal 
efficiency  due  really  to  the  nature  of  the  processes 
which  require  time  is  most  plainly  manifested  in 
the  following  instance.  "  Suppose  that,  in  the 
year  1888,  we  have  command  of  a  definite  quan- 
tity of  productive  instruments,  say,  thirty  days  of 
labour,  we  may  assume  something  like  the  follow- 
ing. The  months  of  labour,  employed  in  methods 
that  give  a  return  immediately,  and  are,  therefore, 
very  unrenumerative,  will  yield  only  100  units  of 
product,  but  of  course  yields  them  only  for  the 
year  1889  ;  employed  in  a  two  years'  process  it 
yields  280  units  for  the  year  1890,  and  so  on 
in  increasing  progression ;  say  350  units  for  1891, 
400  for  1892,  440  for  1893,  470  for  1894,  and  500 
for  1895."! 

Here  time  is  made  to  appear  a  cause  of  objective 
productivity.  But  what  are  the  facts  ?  It  is  not 
the  duration  of  the  process  which  gives  the  in- 
creased yield,  but  the  nature  of  the  processes 
which  take  a  longer  time,  i.e.  the  employment  of 
concrete  forms  of  capital  which  are  more  pro- 
ductive instead  of  concrete  forms  which  are  less 
productive.  Bohm-'Bawerk  shirks  the  issue  by  tak- 
ing for  his  example  "  30  days  of  labour,"  a  thing 
which  is  not  capital,  and  which  is  expressed  in 
terms  of  time.  Let  him  take  concrete  forms  of 
capital  and  he  will  have  difficulty  in  evading  the 
conclusion  that  "  the  technical  superiority  "  consists 
1  p.  2G1. 


284        THE  ECONOMICS   OF  DISTRIBUTION. 

not  in  duration,  but  in  the  industrial  character  of 
these  forms.  ■^ 

When  Bohm-Bawerk  proceeds  to  claim  ^  for  dura- 
tion of  time  increased  value  as  well  as  increased 
technical  productivity,  he  falls  into  another  error. 
In  a  contribution  to  a  theory  of  interest  he  is 
required  to  prove  that  this  time  process  yields 
objective  or  exchange  value.  What  he  actually 
claims  for  it  is  an  increase  of  subjective  value,  or, 
to  quote  his  words,  "  If  it  puts  more  means  of  sat- 
isfaction at  our  disposal,  it  must  have  a  greater 
importance  for  our  well  being."  But  this  greater 
"  satisfaction  "  is  only  one  factor  in  the  attribution 
of  greater  exchange  or  objective  value  to  goods. 

The  confusion  of  thought,  which  is  involved  in 
this  whole  attempt  to  make  time  do  something 
which  it  cannot  do,  is  most  curiously  illustrated 
in  the  final  paragraph  in  which  Bohm-Bawerk  sum- 
marises the  "  positive  result "  of  his  argument. 
"The  relation  between  want  and  provision  for 
want  in  present  and  future,  the  undervaluation  of 
future  pleasures  and  pains,  and  the  technical  ad- 
vantage residing  in  present  goods,  have  the  effect 
that,  to  the  overwhelming  majority  of  men,  the  sub- 
jective use  value  of  present  goods  is  higher  than 
that  of  similar  future  goods.  From  this  relation 
of  subjective  valuation  tliere  folloAvs,  in  the  market 

1  The  tabular  illustration  on  p.  262  only  makes  the  same 
assumption  more  elaborate. 

2  p.  203. 


POSITIVE  THEORY  OF  CAPITAL.  285 

generally,  a  higher  objective  exchange  value  and 
market-price  for  present  goods."  ^  Passing  over 
the  assumption  contained  in  the  last  sentence,  that 
objective  values  are  determined  by  the  subjective 
valuation  of  one  of  the  two  parties  to  an  exchange 
(the  root  fallacy  of  the  Marginal  Utility  School),  I 
wish  to  call  attention  to  the  astonishing  "  argu- 
ment" of  the  earlier  sentence  in  which  "the 
undervaluation  of  future  pleasures  and  pain "  is 
made  a  cause  of  the  fact  that  "  the  subjective  use 
value  of  present  goods  is  higher  than  that  of 
similar  future  goods,"  i.e.  undervaluation  is  the 
cause  of  undervaluation. 

The  involved  reasoning  which  arises  in  the  vain 
effort  to  impute  objective  results  to  purely  subjec- 
tive causes  almost  inevitably  lands  its  author  in 
patent  absurdities  like  this. 

By  stating  the  problem  of  interest  as  consisting 
in  the  undervaluation  of  future  goods,  time  is  rep- 
resented as  a  producer  of  values  by  undoing  this 
undervaluation.  The  point  of  view  which  the 
familiar  process  of  discount  presents  lends  itself 
not  unnaturally  to  this  subjective  view  of  inter- 
est which  assigns  to  time  itself  a  productive 
power.  But  the  attribution  of  such  power  to 
time  is  quite  erroneous.  The  change  of  subjective 
valuation  wliich  comes  with  time  indisputably 
plays  a  part  in  determining  the  price  of  the  use  of 
capital,  or,  in  other  words,  how  much  of  the  total 
1  p.  281. 


286        THE  ECONOMICS   OF  BISTRIBUTION. 

increase  of  objective  productivity  due  to  the 
cooperation  of  capital  witli  the  other  factors  sliall 
be  paid  to  the  owner  of  the  capital ;  but  the  part  it 
plays  is  entirely  different  from  that  assigned  to  it 
by  Bohm-Bawerk.  In  the  pages  of  the  "  Posi- 
tive Theory  "  itself  are  expressions  which  might 
have  put  its  author  on  the  right  track.  "The 
disadvantage  connected  with  the  capitalist  method 
is  its  sacrifice  of  time "  ^  surely  suggests  that 
time  is  a  cost  of  capitalist  production  rather  than 
a  creative  force.  So,  again,  we  are  told  that  capi- 
talism "demands  a  sacrifice  of  time,  but  it  has 
an  advantage  in  the  quantity  of  product,"  which 
surely  suggests  the  entire  truth  that  this  "ad- 
vantage in  the  quantity  of  product,"  affords  a 
fund  out  of  which  payment  of  interest  is  made  for 
the  "cost"  involved  in  "sacrifice  of  time." 

§  9.  Not  merely  are  we  not  justified  in  regard- 
ing time  as  capable  of  the  technical  productivity 
required  to  explain  real  interest,  but  we  cannot 
regard  it  as  creative  of  a  rise  of  subjective  values. 
Because  my  valuation  of  a  house  is  .£100  for  this 
year,  <£95  4s.  for  next,  and  because  in  a  year's 
time  I  shall  value  at  XlOO  what  I  had  valued  at 
.£95  48.,  Bohm-Bawerk  insists  that  by  lapse  of 
time  a  piece  of  goods,  value  <£95  4s.,  has  added 
5  %  to  its  value. 

"We  have  already  noted  the  fallaciousness  at- 
tending the  treatment  of  interest  as  payment  for 
the  use  of  capital  as  valued  in  money.  Since  the 
1  p.  82. 


POSITIVE  THEORY  OF  CAPITAL.  287 

money  value  of  capital  is  onl}'^  obtained  by  capi- 
talising the  interest,  this  process  assumes  the  very 
point  at  issue,  namely,  the  growth  of  value.  For 
if  I  receive  for  the  use  of  forms  of  wealth,  during 
the  past  year,  the  sum  of  £5,  I  proceed  to  do  a 
little  sum  which  enables  me  to  say  that  what  I 
lent  was  worth  =£100  at  the  beginning  of  the  year 
and  X105  including  the  interest  at  the  end.  But 
by  saying  this,  I  beg  the  question  of  a  growth  of 
value  by  my  method  of  reaching  the  ,£100.  I 
only  know  that  what  I  lent  has  been  returned 
with  an  addition  of  gV*  ^  cannot,  however,  assume 
that  the  increased  quantity  of  goods  returned  has 
2^0  greater  value,  either  subjective  or  objective, 
than  the  smaller  quantity  originally  loaned,  for 
this  is  to  assume  an  absolute  stability  or  inherency 
of  value  in  material  forms.  I  am  not  logically 
entitled  to  assert  that  the  bargain  by  which  I  get 
X105  goods  instead  of  .£100  is  a  growth  of  value 
from  cfilOO  to  .£105.  for  if  instead  of  getting  back 
£105  I  only  get  back  <£102,  I  should  be  obliged 
to  say  that  what  I  lent  was  not  worth  XlOO,  but 
a  smaller  sum  of  money.  In  other  words,  the 
value  of  the  capital  is  not  a  prime  datum.,  but  is 
calculated  from  the  interest  by  a  method  which 
assumes  that  an  increase  of  value  has  been  brought 
about  by  the  process  of  lending.  This  increase  of 
value  I  suggest  is  due  to  the  greater  technical 
productivity  which  Bohm-Bawerk  himself  admits 
of  capitalism. 


288       THE  ECONOMICS  OF  DISTRIBUTION. 

§  10.  In  other  words,  the  "ripening  of  future 
into  present  goods  "  by  process  of  time  is  really  a 
cost  theory  of  interest.  The  positive  and  even  the 
productive  complexion  it  puts  upon  the  familiar 
phenomenon  of  discount  or  undervaluation  must 
not  deceive  us.  The  statement  of  undervaluation 
is  simply  the  quantitative  statement  of  the  cost  of 
abstinence  which  involves  time  as  a  condition  of 
its  operation.  If  I  value  the  services  of  a  house 
at  <£100  for  this  year,  my  preference  of  present 
to  future  enjoyment  may  lead  me  to  value  next 
year's  services  at  £95  4s.  But  when  next  year 
actually  comes  my  £95  4s.  valuation  has  risen  to 
,£100.  But  to  say  that  I  now  esteem  the  current 
year's  services  at  £5  more  than  I  esteem  the  pro- 
spective services  of  next  year  is  only  another  and 
a  less  obvious  way  of  saying  that  I  estimate  the 
loss  or  pain  of  a  year's  postponement  of  satisfaction 
at  <£5.  If  I  could  take  out  the  whole  satisfaction 
at  once,  the  man  who  shall  persuade  me  to  post- 
pone it  must  pay  me  what  the  market  determines 
to  be  the  price  of  this  effort  of  abstinence  or  post- 
ponement. It  is  evident  what  time  does  here,  and 
what  it  does  not  do.  It  does  not  create  either 
increased  product  or  increased  value,  but  does 
constitute  a  condition  of  the  cost  which,  by  affect- 
ing the  supply  of  capital,  helps  to  determine  the 
price  of  the  use  of  that  capital,  or  from  the  stand- 
point of  the  capitalist  the  price  of  the  effort  of 
abstinence.     I  have  already  sliown  that  this  absti- 


POSITIVE   THEORY  OF  CAPITAL.  289 

nence  is  not  a  merely  negative  force,  but  one 
which  must  be  ranked  as  positive  and  productive, 
at  any  rate  in  the  sense  that  it  is  essential  to  the 
existence  and  so  to  the  technical  productivity  of 
capital. 

Undervaluation,  or  discounting  of  future  values, 
is  simply  one  way  in  which  the  cost  of  abstinence 
presents  itself  to  the  mind  of  the  person  who 
saves  or  lends.  It  is  not  a  source  of  interest,  it 
affords  no  explanation  of  the  possibility  of  objec- 
tive interest,  it  is  simply  one  determinant  of  the 
amount  or  rate  of  interest.  As  an  economic 
factor  in  the  determination  of  price  it  ranks  as  a 
subjective  cost  with  the  subjective  cost  of  labour, 
and  as  an  expense  of  production  must  be  defrayed 
out  of  the  extra  product  due  to  the  productive 
cooperation  of  the  capital  and  labour. 

§  11.  It  is  to  be  clearly  understood  that  I  do 
not  dispute  any  of  the  facts  of  Bohm-Bawerk's 
statement  of  undervaluation,  or  that  they  have  a 
true  bearing  upon  the  problem  of  interest.  Where 
I  join  issue  with  him  is  that  while  he  admits  the 
productive  services  of  forms  of  capital,  he  refuses 
to  regard  these  services  as  the  root  and  indispen- 
sable condition  of  interest  and  finds  instead  a 
purely  subjective  cause. 

Let  me  briefly  rehearse  my  objection  to  his  argu- 
ment as  to  the  payment  of  interest  for  use  of  dura- 
ble goods.  He  says,  "  If  the  current  year's  use  of 
a  machine  is  worth  100,  and  the  machine  is  capable 


290        THE  ECONOMICS   OF  DISTRIBUTION. 

of  doing  work  of  equal  qualit}'  for  five  years  more, 
the  machine  is  not  worth  6  x  100,  but  100  +  95.23 
+  90.70  +  82.27  +  78.35  =  532.93."!  The  capi- 
tal valuation  of  the  machine  at  the  beginning  will 
be  532.93  ;  but,  during  the  six  years  it  lasts,  the 
total  use  or  "  consumption  "  of  the  machine  will 
work  out  at  an  aggregate  value  of  600.  The 
difference  between  the  two  sums  affords  a  fund 
out  of  which  interest  is  payable.  This  fund  ap- 
pears to  arise  from  the  ripening  process  of  time. 
Now  I  dispute  none  of  the  facts  in  this  statement, 
but  I  assert  that  they  do  not  furnish  the  required 
explanation  of  the  economic  phenomena  which 
actually  occur  when  a  loan  of  durable  goods  is 
made.  As  a  matter  of  fact,  when  a  loan  of  a 
machine  or  other  durable  goods  is  made,  the  terms 
are  such  as  to  secure  a  permanent  life  for  the 
machine  ;  interest  does  not  fructify  during  six 
years,  but  for  a  perpetuity.  According  to  Bohm- 
Bawerk's  setting,  it  is  possible  to  obtain  the  exact 
value  of  the  capital  by  adding  up  the  value  of  the 
services  of  six  years  ;  in  actual  industr}',  though 
the  capital  possesses  an  exact  known  value  at  the 
outset,  its  value  for  purposes  of  loan  or  invest- 
ment is  not  calculated  by  consideration  of  its  gross 
services  during  the  time  it  lasts,  but  by  capitalisa- 
tion on  the  basis  of  the  value  of  the  net  interest, 
after  provision  for  its  continuous  existence  has 
been  made.  If  A  rents  to  li  a  house  or  a  machine, 
1  p.  343. 


POSITIVE   THEORY  OF  CAPITAL.  291 

he  reckons  the  capital  value  of  this  loan  by  capi- 
talising the  rent  or  net  interest,  provision  being 
made  to  repair  or  replace  the  house  or  machine. 
Now,  since  an  indefinite  or  eternal  life  is  thus  se- 
cured to  the  house  or  machine,  it  cannot  be  pre- 
tended that  the  capital  value  can  be  obtained  by 
adding  the  yearly  values,  for  these  would  come 
out  as  infinity.  Bohm-Bawerk's  explanation  of 
interest  ignores,  in  the  first  place,  the  actual  in- 
dustrial services  or  "  productivity  "  of  the  capital 
forms  which  are  used,  and  whose  use  or  consump- 
tion do  actually  furnish  the  goods  whose  "  value  " 
is  returned  as  yearly  interest  to  the  owner,  and 
finds  the  cause  of  interest  in  what  is  really  a  con- 
dition of  this  productivity.  In  the  second  place, 
it  posits  a  fixed  duration  to  the  functioning  of 
form  of  capital  which  is  discordant  with  indus- 
trial facts.  For  the  actual  phenomenon  which 
seeks  explanation  is  the  eternity  of  interest  paid 
for  the  loan  of  a  material  form  whose  existence 
appears  to  be  perishable.  I  have  tendered  an 
explanation  of  this  phenomenon  by  showing  that 
the  economic  existence  of  a  material  form  of  capi- 
tal is  not  really  terminable,  but  that  it  exerts  a 
productive  force  which  can  secure  for  it  a  per- 
petuity of  existence,  and  leave  a  margin  of  prod- 
uct from  which  perpetual  interest  may  be  paid. 
By  ignoring  the  "  productivity  "  of  the  services  of 
capital,  which  he  yet  generally  admits  to  exist, 
and  confining  his  attention  to  a  merely  subjective 


292        THE  ECONOMICS   OF  DISTRIBUTION. 

phenomenon,  —  the  change  in  the  mind  of  the 
lender,  —  Bohn-Bawerk  cuts  himself  off  from  all 
possibility  of  explaining  the  real  problem  of  a 
perpetuity  of  net  interest. 

He  rightly  insists  that,  in  order  to  support  this 
theory  of  interest  derived  from  productivity,  it  is 
necessary  to  prove  a  net  surplus  product  after  pro- 
vision against  wear  and  tear  of  capital,  what  he 
terms  a  "  net  Nutzung."  I  claim  to  have  shown, 
by  illustration  from  each  of  the  several  classes  of 
capital  forms,  that  this  surplus  product  or  "net 
Nutzung  "  does  exist. 

Thus,  and  thus  alone,  is  it  possible  to  place  capi- 
tal on  the  same  footing  with  nature  and  labour. 
In  the  case  of  these  two  factors,  a  net  surplus 
product,  after  replacement  of  wear  and  tear,  is 
admitted.  The  ordinary  finance  of  the  business 
world  enables  us  to  attribute  to  capital  a  direct 
productivity  analogous  to  that  of  nature  and  la- 
bour, of  such  size  that,  after  similar  provision  for 
replacement  has  been  made,  a  positive  surplus  may 
exist  for  payment  of  net  interest. 

Time  is  "a  condition,  on  tlie  one  hand,  of  the 
effort  of  abstinence  which  keeps  as  jiroductive 
goods  a  value  which  would  otherwise  be  consumed 
as  consumption  goods;  and,  on  the  other  hand, 
of  the  productivity  of  the  forms  of  capital  which 
this  abstinence  supports.  The  productivity  thus 
obtained  furnishes  a  net  product  wliich  forms  a 
material  economic  fund  out  of  which  real  interest 


POSITIVE   THEORY  OF  CAPITAL.  293 

may  be  paid ;  the  amount  of  this  real  interest  is 
determined  directly  by  the  relation  between  the 
marginal  cost  of  the  abstinence,  and  the  mar- 
ginal utility  of  the  "  use  of  capital,"  which  is  the 
effect  of  that  abstinence. 

§  12.  In  thus  repudiating  the  explanation  of 
B5hm-Bawerk,  we  do  not  return  to  a  mere  "  pro- 
ductivity "  theory  of  interest.  Productivity  is 
not  to  be  termed  the  efficient  cause,  but  only  the 
essential  material  condition  of  interest.  Produc- 
tivity of  capital  is  consistent  with  the  non-emer- 
gence of  interest.  The  value  and  pj-ice  of  use  of 
capital  emerge,  as  do  all  values  and  prices,  from 
the  interaction  of  marginal  cost  and  marginal 
utility  of  that  which  is  bought  and  sold. 

The  representation  of  the  problem  of  interest, 
as  residing  in  an  exchange  of  present  against 
future  goods,  does  not  accord  with  the  facts  of 
commercial  life,  and  throwing  the  whole  issue 
upon  conditions  of  subjective  valuations,  or  differ- 
ences in  the  mental  vision  of  buyers  and  sellers,  it 
furnishes  no  fund  for  the  payment  of  objective  in- 
terest. What  is  actually  bought  and  paid  for  by 
net  interest  is  use  of  capital,  and,  in  order  that 
payment  may  be  made,  that  use  must  find  expres- 
sion in  perpetual  productivity. 

I  may,  in  conclusion,  sum  up  my  objections 
against  Bohm-Bawerk's  theory  of  Interest,  in  these 
four  sentences :  — 

1.    By  denying  the  necessity  of  attributing  ob- 


294        THE  ECONOMICS   OF  DISTRIBUTION. 

jective  productivity  to  capital,  he  provides  no  fund 
for  the  payment  of  objective  interest. 

2.  He  furnishes  no  explanation  of  the  actual 
phenomenon  of  the  eternity  of  interest. 

3.  He  misrepresents  the  transaction  as  an  ex- 
change of  present  against  future  goods,  making 
the  issue  one  of  subjective  valuation  alone. 

4.  The  undervaluation  of  future  goods  assigned 
as  the  economic  cause  of  interest  is  in  reality  a 
"  cost "  of  the  functioning  of  capital,  and  furnishes 
one  side  of  the  forces  which  determine  the  value 
and  the  price  of  use  of  capital. 


CHAPTER  X. 

THE  THEORY  OP  SURPLUS  VALUE  — ITS  INFLUENCE 
UPON   DISTRIBUTION. 

§  1.  If  the  analysis  of  economic  bargaining 
given  in  the  preceding  chapters  is  correct,  it  can- 
not fail  to  have  an  important  corrective  influence 
upon  the  theory  and  the  practice  of  Distribution. 

Although  the  direct  treatment  of  ethical  con- 
siderations is  still  commonly  ruled  out  of  economic 
theory,  it  has  always  been  tacitly  assumed  by 
laissez-faire  economists  that  the  laws  regulating 
distribution  normally  assign  to  each  owner  of  a 
factor  of  production  that  portion  of  the  product 
which  is  economically  necessary  to  evoke  and 
maintain  the  efficient  operation  of  his  factor,  and 
nothing  more. 

It  is  claimed  that  competition,  or  the  free  play 
of  enlightened  self-interest,  among  the  owners  of 
capital,  organising  ability,  and  labour-power,  pre- 
vents the  capitalist  undertaker  or  the  labourer 
from  receiving  any  more  than  the  minimum  so- 
cially necessary  under  existing  circumstances  to 
secure  the  service  he  is  capable  of  rendering. 
Any  interference  with  the  operation  of  this  natural 

295 


296       THE  ECONOMICS   OF  BISTBIBUTION. 

law  has  been  represented  as  slight  and  transitory 
—  a  necessary  friction  for  which  special  allowance 
is  to  be  made.  There  are  no  powerful  or  enduring 
economic  forces  which  enable  the  owners  of  any 
class  of  land,  labour,  capital,  or  business  ability  to 
secure  more  than  the  necessary  minimum.  The 
freedom  of  competition  among  the  owners  of  the 
several  factors,  if  not  absolute,  is  such  as  to 
provide  a  process  of  filtration  by  which  the  whole 
advantage  of  improvements  in  methods  of  produc- 
tion of  wealth  passes  into  the  hands  of  the  con- 
sumer. "  It  is  the  consumer  who  is  the  residual 
claimant  in  the  results  of  modern  industry."  ^ 

Each  producer  gets  his  minimum  ;  the  rest  goes 
to  the  consumer,  and  as  all  are  consumers,  the 
operation  of  the  Law  of  Distribution  is  even  con- 
formable to  a  general  sense  of  justice  or  of  social 
expediency.  Some  little  hitch  rises  in  the  mat- 
ter of  economic  rent  of  land;  from  Adam  Smith 
downward  the  laissez-faire  economists  felt  that  the 
power  of  the  landowner  to  reap  where  he  had  not 
sown  failed  to  harmonise  with  the  moral  symme- 
try which,  in  spite  of  occasional  disclaimers,  they 
really  esteemed  as  a  buttress  of  economic  doctrine. 

But,  after  all,  rent  did  not  affect  directly  the 
consumer  ;  it  did  not  enter  into  price,  nor  did  it 
defraud  labourer  or  capitalist,  wlio  got  their  due 
wage  and  profit. 

Taxes  levied  upon  tlie  agricultural  classes  and 
1  Hadley,  Economics,  p.  318. 


THE  THEORY  OF  SUBPLUS   VALUE.       297 

more  or  less  upon  manufactures  and  commerce 
tended  to  settle  upon  rent,  and  an  extension  of 
this  policy  might  enable  the  community  to  remedy 
what  might  seem  to  be  a  natural  injustice. 

It  -is  curious  to  note  how  seldom  economists 
since  Ricardo  have  taken  the  troiible  to  probe 
the  loose  and  flabby  notion  which  represents  the 
consumer  as  a  fourth  party  in  the  act  of  distribu- 
tion, in  whose  interests  the  antagonisms  of  land, 
labour,  capital,  find  an  ultimate  harmony.  Pro- 
fessor Hadley  speaks  of  the  consumer  as  "the 
residual  element,"  seeming  to  imply  that  all  con- 
sumers must  be  equally  able  to  hold  and  to  enjoy 
the  benefits  of  improved  industry  which  reach 
them  in  the  shape  of  lower  prices. 

Now  if  the  labourer,  in  his  caj)acity  of  con- 
sumer, is  able  to  hold  all  the  advantages  of  falling 
prices,  then  his  real  wages,  the  only  source  of  the 
money  income  whicli  he  spends,  are  capable  of 
rising  indefinitely  above  the  necessary  minimum. 
The  same  holds  of  the  interest  of  the  capitalist. 
Again,  if  classes  of  labourers  and  capitalists  are 
necessarily  able  to  maintain  rates  of  real  wages 
and  real  interests  beyond  the  minimum,  they  will 
exert  their  power  as  producers,. and  this  rise  of 
real  wages  and  interests  would  prevent  prices  from 
falling,  for  it  would  imply  a  stability  in  those 
expenses  of  production  which  admittedly  enter 
into  price.  The  forces  upon  which  the  laissez- 
faire   economist    relies    to   prevent    capital    and 


298       THE  ECONOMICS   OF  DISTRIBUTION. 

labour  from  taking  more  than  minimum  profits 
and  wages,  will  seem  to  prevent  labourer  or  capi- 
talist from  holding  the  advantage  assigned  to  them 
as  consumers. 

The  theory  of  the  incidence  of  taxation  suffers 
from  this  same  confusion.  It  is  often  urged  that 
a  tax  laid  upon  some  product  or  some  factor  of 
production  will  be  shifted  on  to  the  consumer 
through  a  rise  of  prices.  But  this,  though  often 
true,  is  no  ultimate  analysis.  For  it  will  be  ad- 
mitted that  consumers  can  in  some  cases  throw 
back  the  tax  upon  some  body  of  producers.  The 
only  consumers  who  must  be  deemed  taxable,  qua 
consumers,  are  those  in  receipt  of  a  guaranteed 
money  income ;  those  whose  income  is  derived 
from  and  fluctuates  with  the  value  of  some  factor 
of  production  will  be  liable  to  have  their  income 
affected  by  a  tax  which  is  imposed  upon  them  in 
an  enhanced  price  of  commodities.  It  would  be 
necessary  to  investigate  the  sources  of  income  of 
each  consumer  closely  in  order  to  ascertain  how 
far  he  ultimately  bore  a  tax  which  raised  the  price 
of  the  commodities  he  consumed.  The  ability  to 
throw  back  a  tax  upon  producers  and  the  rapidity 
of  such  rejection  are  matters  for  detailed  practical 
inquiry.  But  in  a  theory  of  Taxation  every  part 
of  a  tax  must  in  its  ultimate  incidence  be  traced 
to  some  class  of  producers,  if  we  are  to  understand 
its  effect  upon  the  distribution  of  wealth. 

In  a  word,  for  purposes  of  the  theory  of  Distri- 


TUE   THEOltY   OF  SURPLUS    VALUE.        299 

bution,  the  antithesis  of  producer  and  consumer  is 
a  false  one.  The  problem  of  distribution  is  that 
of  the  payment  of  owners  of  factors  of  produc- 
tion, and  whatever  advantage  may  actually  accrue 
to  each  or  any  of  the  producers,  by  reason  of  a  fall 
of  prices  to  consumers,  must  be  reckoned  as  a  part 
of  the  real  rent,  wages,  or  interest  which  they 
receive. 

We  are  entitled  to  dismiss  altogether  the  con- 
sideration of  the  consumer  in  dealing  with  the 
theory  of  distribution,  provided  that  we  deal  with 
real  payments  for  the  use  of  factors  of  production. 

§  2.  It  is,  however,  the  consideration  of  the 
composition  of  a  price  which  brings  out  the  differ- 
ence between  our  theory  and  the  ordinary  theory 
of  English  text-books.  According  to  the  latter, 
the  price  of  a  consumption  good  is  entirely  resolva- 
ble into  a  number  of  expenses  of  production  at  the 
several  stages  of  production  which  represent  the 
marginal  cost  of  the  labour  and  capital  there  em- 
ployed. Now  the  whole  tenor  of  our  analysis  has 
gone  to  show  that  the  price  of  a  commodity  is  not 
exhausted  by  the  payment  of  these  various  mini- 
mum money-costs  of  production. 

Let  me  briefly  rehearse  the  method  of  reasoning- 
adopted. 

First,  by  analysis  of  the  process  of  determining 
a  price  of  commodities  in  a  market,  we  recognise 
the  existence  of  an  element  of  price  which  was 
not  explained  by  competition,  which  \\'as  not  nee- 


300       THE  ECONOMICS   OF  DISTRIBUTION. 

essary  to  induce  the  final  pair  of  bargainers  to 
complete  that  bargain  whose  terms  set  the  price 
for  the  market.  In  other  words,  we  recognised  the 
actual  existence  of  an  element  of  "forced  gain," 
something  not  paid  for  as  a  "cost"  of  production, 
but  yet  forming  an  expense. 

Next,  resolving  the  price  of  a  commodity  into 
the  several  prices  of  uses  of  factors  of  production 
which  entered  into  it,  we  investigated  the  condi- 
tions of  determining  the  price  of  the  use  of  land. 
Here  we  saw  that  while  differential  rents  of  land 
did  not  enter  into  price,  the  worst  land  in  use  for 
most  specific  purposes  yielded  a  positive  rent,  that 
this  marginal  rent  being  necessary  to  evoke  the 
use  of  land  for  this  purpose  must  enter  into  price, 
and  that  the  price  of  a  consumption  good  will 
contain  various  marginal  rents  of  land. 

Investigating  in  similar  fashion  the  determina- 
tion of  the  prices  for  use  of  capital  and  labour, 
we  found  that  they  did  not  differ  essentially  from 
land  in  yielding  marginal  rents  ;  that  both  capital 
and  labour  could  rightly  be  divided  into  practi- 
cally non-competing  groups,  from  which  emerged 
a  number  of  marginal  class  interests  and  wages, 
which  entered  into  price. 

Under  the  logical  system  of  laissez-faire  eco- 
nomics, there  was  properly  no  social  problem  of 
distribution  to  be  solved,  unless  it  were  the  ques- 
tion of  the  advisability  of  permitting  private  own- 
ership of  land  ;  the  coni})lete  luirmony  of  capital 


THE   THEORY  OF  SURPLUS   VALUE.       301 

and  labour  was  secured  by  the  competition  of 
owners  of  capital  and  labour-power,  which  would 
prevent  the  existence  of  any  surplus  beyond  the 
necessary  payments  to  the  capital  and  the  labour 
employed  under  the  least  favourable  circumstances. 
Even  allowing  that  the  operation  of  the  law  of 
increasing  returns  would  yield  to  the  larger  busi- 
nesses a  gain  over  and  above  this  minimum  inter- 
est, it  would  be  difficult  to  regard  this  differential 
gain  as  a  cause  of  discord  between  capital  and 
labour,  for  it  would  not  be  possible  for  the  la- 
bourers employed  in  these  more  profitable  busi- 
nesses to  obtain  a  higher  price  for  the  sale  of  their 
labour-power  than  those  employed  in  the  least 
profitable  businesses.  So  long  as  it  is  held  that 
only  the  bare  money  costs  of  marginal  capital  and 
labour  enter  into  price,  while  rent  of  land  is  alto- 
gether excluded,  the  problem  of  distribution  is  of 
a  mechanical  and  business  nature  which  cannot 
rightly  engage  the  feelings  or  activities  of  the 
owners  of  factors  of  production. 

The  analysis  offered  here  entirely  changes  the 
character  of  the  problem.  The  prime  distinction 
is  no  longer  interest,  wages,  and  rent,  but  between 
costs  of  subsistence  of  various  factors  of  produc- 
tion on  the  one  hand,  and  a  variety  of  marginal 
and  differential  "  rents  "  supported  by  various  de- 
grees of  economic  necessity  upon  the  other. 

It  is  of  the  first  importance  to  understand  what 
is  respectivel}^  comprised  under  these  two  heads. 


302       THE  ECONOMICS   OF  DISTRIBUTION. 

Distribution  is  acliievecl,  excepting  the  cases  of 
annuitants,  officials  with  fixed  salaries,  etc.,  by  a 
series  of  variable  payments  for  the  use  of  labour- 
power,^  forms  of  capital,  or  land.  These  pay- 
ments are  made  at  each  stage  in  the  processes  of 
production  out  of  moneys  received  from  the  sales 
of  goods  or  services. 

The  money  paid  as  the  price  of  retail  goods  is 
partly  used  by  the  shopkeeper  to  maintain  his  re- 
duced stock  and  his  premises,  etc.,  partlj^  to  pay 
wages,  profit,  rent  for  the  factors  of  production 
he  employs.  The  merchant  from  whom  he  pur- 
chases goods  effects  a  similar  distribution,  and  so 
does  the  manufacturer,  the  farmer,  and  the  other 
responsible  managers  of  the  earlier  processes  of 
production.  Thus  the  circulation  of  the  money 
said  to  be  "  spent  "  is  achieved:  the  money  which, 
being  "  saved,"  is  used  by  the  saver  to  buy  new 
forms  of  capital,  undergoes  a  similar  process  of 
distribution. 

Thus  the  aggregate  payment  for  a  supply  of 
commodities  is  resolvable  into  a  number  of  sepa- 
rate payments  for  the  use  of  the  factors  that  are 
engaged  in  the  several  processes  of  production. 
Now  the  central  problem  of  distribution  consists 

1  lu  this  general  setting  of  the  Theory  of  Distribution,  I  have 
thought  it  best  to  include  under  wages  all  kinds  of  payment 
for  industrial  work,  including  earnings  of  management,  and 
much,  if  not  most,  of  what  is  commonly  included  vuider  profit, 
because  no  different  principle  is  involved  in  the  determination 
of  these  earnings. 


THE  THEORY  OF  SURPLUS    VALUE. 


803 


in  the  varying  degrees  and  conditions  of  necessity 
attaching  to  the  different  parts  of  these  payments 
for  use  of  factors  of  production. 

In  restating  this  problem  a  simple  diagram 
will  help  to  mark  the  distinctions.  A I  represents 
the  total  supply  of  a  factor,  either  land,  labour, 


or  capital,  toward  a  specific  market,  comprised  of 
units  AB,  BC,  CD,  etc.,  with  varying  degrees  of 
value,  HI  being  the  marginal  or  least  valuable 
unit  of  supply.  The  total  payment  for  the  use 
of  this  factor  of  production  is  the  figure  on  the 
base  AI.  Following  our  analysis  we  may  repre- 
sent this  payment  as  divisible  into  the  following 
parts  :  the  lowest  portion  will  be  a  payment  of 
subsistence  or  maintenance,  the  sum  just  suJiicient 


304       THE  ECONOMICS  OF  DISTRIBUTION. 

to  secure  the  economic  use  of  the  unit  in  default 
of  any  alternative  use.  This  amounts  in  the 
present  case  to  20s.  per  unit  of  supply.  In  the 
case  of  labour  we  posited  a  subsistence  wage  of 
15s.  for  labour  of  lowest  skill  ;  in  the  case  of  capital 
a  minimum  interest  of  2^  % .  In  the  case  of  land 
a  payment  infinitesimally  small  would,  in  theory, 
be  able  to  secure  the  use,  so  that  here  the  line  KL 
would  fall  so  as  to  stand  only  just  above  AI. 

In  the  case  set  forth  in  our  diagram  the  worst 
or  "  marginal "  portion  of  supply  gets  something 
more  than  this  "rent"  of  bare  subsistence.  The 
"  rent"  it  actually  receives,  the  "  marginal  rent,"  is 
40s.  instead  of  20s.  It  can  obtain  the  additional 
20s.  chiefly  because  one  or  more  of  the  units  of 
supply  have  an  alternative  use  open  to  them  from 
which  they  could  earn  a  high  differential  rent. 
Say  that  AB  has  such  alternative  use  open  to  it. 
In  order  to  secure  AB  for  the  supply  in  question 
it  may  be  necessary  to  pay  it  at  the  rate  of  65s., 
because  its  alternative  use  would  yield  64s. 

This  explains  the  major  part  of  what  figures  on 
the  diagram  as  marginal  rent,  but  not  the  whole. 
For  if  AB  only  got  65s.,  HI,  the  marginal  unit  of 
supply,  would  only  get  a  marginal  rent  of  30s. 
instead  of  40s.,  for  we  have  seen  that  the  actual 
margin  is  determined  (other  things  equal)  by  the 
necessary  price  of  that  portion  of  supply  with  an 
alternative  use,  which  we  call  the  "determinant 
portion  of  supply."     Now  if  AB  could  only  get 


THE  THEORY  OF  SURPLUS   VALUE.       305 

65s.  and  HI  30«.,  the  dotted  line  would  represent 
the  margin. 

But  we  have  seen  that  although  AB  could  be  in- 
duced to  contribute  to  supply  at  65s.,  he  may  for  all 
that  be  able  to  claim  75s.,  if  in  the  bargaining  for 
a  price  he  is  the  stronger  party,  and  can  claim  a 
"forced  gain."  The  actual  margin  of  40s,  in  our 
diagram  supposes  that  AB  is  in  a  position  to  take 
this  forced  gain  of  10s.,  being  able  to  secure  for 
his  services  not  65s.  but  75s.  If  he  has  this 
power,  each  of  the  other  contributors  to  supply 
will  profit  by  it,  since  their  payment  is  deter- 
mined by  his.  If  he  can  take  75s.,  the  next 
productive  unit  can  get  70s.,  although  he  may 
have  no  alternative  use  open  to  him  and  would 
therefore,  if  necessary,  have  been  willing  to  accept 
a  far  lower  price.  The  determinant  portion  of 
supply  fixes  the  marginal  rent  or  price.  In  our 
present  case  the  marginal  rent  is  40s.,  of  which 
20s.  is  payment  of  subsistence,  10s.  dependent 
upon  an  alternative  use  of  some  portion  of  supply, 
and  10s.  a  "forced  gain."  In  addition  to  the  40s. 
at  the  margin,  superior  units  of  supply  can  take 
differential  rents  marking  the  degrees  of  their 
superiority. 

Now  we  have  seen  that  all  these  payments  are 
"  necessary  "  in  the  sense  that  they  issue  naturally 
from  processes  of  competition  and  bargain  in 
which  each  competitor  and  bargainer  seeks  to 
get  the  maximum  gain  for  himself. 


306        TEE  ECONOMICS   OF  DISTRIBUTION. 

But  they  are  not  equally  necessary  in  the  sense 
that  they  are  payments  essential  as  economic 
motives  to  the  application  of  the  productive  force 
for  which  they  are  paid,  and  cannot  be  refused  or 
diverted  without  interference  with  the  present 
course  of  industry. 

The  issue  is  fraught  both  with  theoretical  and 
practical  importance.  It  can  be  best  approached 
from  the  standpoint  of  taxation.  Power  to  resist 
taxation  is  the  most  efficacious  test  of  economic 
necessity.  Let  us  therefore  inquire  what  is  the 
relative  ability  of  subsistence  payment,  marginal 
rents  (comprising  forced  gain  and  a  differential 
rent),  and  differential  rents  to  resist  direct  and 
indirect  taxation. 

The  taxability  of  subsistence  payments  need  not 
detain  us  long.  True  wages  of  subsistence  for 
labour  or  for  capital  cannot  be  taxed  :  non-taxi- 
bility  is  in  reality  implied  in  the  very  nature  of 
a  subsistence  payment.  It  may,  however,  be 
briefly  illustrated  thus.  Let  us  suppose  that  the 
marginal  wage  of  unskilled  labour  in  a  town 
stands  at  a  15s.  subsistence  wage,  and  that  an 
attempt  is  made  under  an  old-age  pension  scheme 
to  stop  Is.  per  week  out  of  wages  as  a  tax  con- 
tributory to  a  pension.  What  happens  ?  There 
exist  ex  hi/pothesi  unskilled  labourers  who,  if  the 
real  wages  represented  by  15s.  are  reduced,  will 
refuse  to  contribute  to  the  supply  of  labour. 
These  "  determinant  owners  of  supply  "  would  go 


THE  THEORY  OF  SURPLUS    VALUE.       307 

on  tramp,  cadge,  beg,  or  steal,  if  158.  is  not 
guaranteed  to  them.  If  employers,  tlierefore, 
were  empowered  to  stop  Is.  out  of  the  15s. 
wages,  the  refusal  of  these  men  to  work  would 
reduce  the  supply  of  labour,  and,  since  the  effec- 
tive demand  must  be  presumed  to  be  constant,  the 
price  or  wages  will  rise  and  the  Is.  per  week  will 
be  stopped  out  of  IGs.  instead  of  out  of  15s.,  this 
rise  of  money  wage  preventing  the  withdrawal  of 
labour  from  assuming  any  considerable  propor- 
tions. At  this  stage  it  appears  as  if  the  employer 
must  pay  an  extra  shilling,  representing  the  tax, 
out  of  his  own  pocket.  If  his  business  is  earning 
for  him  a  higher  rate  of  profit  than  is  economically 
necessary  to  support  the  capital  and  skill  engaged 
in  it,  the  tax  will  probably  be  defrayed,  in  large 
part  at  any  rate,  out  of  these  surplus  profits,  as  it 
will  probably  not  pay  him  to  raise  prices  which 
are  not  fixed  by  conditions  of  close  competition. 
If,  however,  the  employer's  profits  are  already  cut 
down  to  a  "  subsistence  "  rate,  the  tax  cannot  be 
defrayed  by  him.  If  the  trade  is  one  into  which 
scarcity  rents  of  land  enter  as  an  expense  of  pro- 
duction, a  portion,  at  any  rate,  of  the  tax  may  at 
this  stage  be  shifted  on  to  the  landowner  through 
a  pressure  by  tenants  operating  through  reduction 
in  demand  for  land-use.  But  it  is  safer  to  assume 
that  an  increased  wage-bill,  shared  by  all  the 
employers  in  a  trade,  will  oblige  them  to  raise  the 
prices  of  the  goods  they  sell,  and  pass  the  tax  on 


308        THE  ECONOMICS   OF  DISTRIBUTION. 

to  the  consumer  through  enhanced  prices.  But 
we  have  already  seen  that  the  consumer  is  a  purely 
fictitious  halting-place  in  the  theory  of  Distribu- 
tion. Making  the  consumer  pay  is  no  final  policy. 
Our  16s.  low-skilled  labourer  is  a  consumer.  It 
appears  therefore,  that  though  he  has  thrown  off 
the  tax  imposed  upon  him  as  producer,  he  must 
take  up  his  share  as  consumer,  by  paying  higher 
prices  for  the  goods  he  buys.  But  this  is  not  the 
case.  He  must  have  guaranteed  to  him  as  a  con- 
dition of  contributing  to  the  labour-market  such 
weekly  sum  of  commodities  as  16s.  would  have 
bought  for  him.  If  owing  to  the  rise  of  prices  a 
net  wage  of  16s.  will  no  longer  buy  these  com- 
modities, his  money  wage  must  undergo  a  further 
increase  by  virtue  of  the  same  economic  prices 
which  raised  his  normal  wage  from  15s.  to  16s. 
to  meet  the  stoppage  of  Is.  from  his  wages.  This 
rise  of  wage  is  in  effect  another  tax,  which  will 
pass  on  a  similar  journey  to  the  first,  seeking  some 
"  surplus  "  or  unnecessary  element  of  income  upon 
which  to  lie.  What  holds  of  the  subsistence 
wage  of  unskilled  labour  can  equally  be  shown  to 
hold  of  all  other  subsistence  payments.  If  it  were 
necessary  to  evoke  the  savings  of  the  "  determi- 
nant saver"  by  paying  2^%  interest,  it  will  not  be 
possible  to  tax  this  element  of  income  in  the  form 
of  an  income  tax  or  indirectly  through  the  prices 
of  commodities. 

This  argument  assumes,  of  course,  that  subsist- 


THE  THEOBY  OF  SURPLUS    VALUE.       309 

ence  wages  are  based  upon  natural  necessities 
and  not  on  conventional  necessities.  The  latter, 
though  possessing  a  strong  power  of  resisting 
taxation  when  firmly  embedded  in  a  customary 
standard  of  life,  may  be  defeated  and  rendered 
taxable  by  a  steady  prolonged  attack.  Moreover, 
though  true  subsistence  payments  are  not  really 
amenable  to  taxation,  attempts  to  tax  them, 
especially  when  levelled  at  skilled  labour  whose 
true  subsistence  is  more  expensive,  may  be  fraught 
with  grave  injury  by  degrading  the  standard  alike 
of  working  efficiency  and  life  of  a  class  of  work- 
ers. Taxation  has  been  commonly  directed  so  as 
to  prevent  a  rise  of  efficiency  in  work  and  life  of 
the  working  classes  in  a  country.  None  the  less 
it  is  true  that  true  subsistence  wages,  i.e.  such 
wages  as  a  really  enlightened  employer  will  find 
it  profitable  to  pay,  resist  taxation. 

§  3.  Turning  next  to  marginal  and  differential 
rents,  it  is  convenient  first  to  deal  with  the  ele- 
ment in  marginal  rents  called  "forced  gain." 
These  forced  gains  issue,  as  our  analysis  dis- 
closes, in  the  determination  of  a  price  where  one 
of  the  final  pair  is  able  to  force  the  price  up, 
beyond  what  he  would  be  willing  to  take,  to 
the  utmost  that  his  opponent  is  willing  to  give. 
When  markets  are  small  and  competition  very 
slight  and  ineffective,  we  saw  that  these  forced 
gains  made  a  large  element  in  prices.  Tlieir  dis- 
tinctive character  is  that  they  are  not  earned  by 


310       THE  ECONOMICS   OF  DISTRIBUTION. 

any  effort  of  production,  but  constitute  a  gratu- 
itous surplus  which  is  obtained  by  the  stronger 
bargainer.  Forming  no  economic  motive  to  any 
bargains,  they  cannot,  in  theory  at  any  rate,  resist 
taxation.  A  tax  imposed  upon  them  as  an  ele- 
ment of  income  could  not  be  transferred  to  any 
other  element  of  income. 

But  these  "  forced  gains,"  forming,  as  we  have 
seen,  a  part  of  "  marginal  rents,"  enter  into  the 
prices  of  commodities  as  portions  of  the  marginal 
expenses  of  production.  It  is  therefore  impor- 
tant to  consider  whether  a  tax  levied  upon  the 
price  of  commodities  with  which  they  enter  will 
fall  upon  them. 

The  commonly  accepted  theory  that  taxes  upon 
commodities  generally  fall  upon  the  consumer  is 
based  upon  the  supposition  that  their  prices  only 
measure  the  necessary  money-costs  of  producing 
the  portion  of  supply  produced  under  the  least 
favourable  circumstances.  Taxes  upon  commodi- 
ties, in  conformity  with  this  supposition,  must  nor- 
mally fall  upon  the  consumer  who  pays  the  tax 
in  enhanced  prices.  Are  these  "  forced  gains  " 
necessary  money-costs  in  this  sense? 

Mill,  in  his  formulation  of  the  principle  that 
a  tax  upon  commodities  falls  upon  the  consumer, 
admits  an  exception  in  cases  where  "the  article  is  a 
strict  monopoly  and  at  a  scarcity  price."  ^ 

"  The  price  in  this  case  being  only  limited  by 
1  Principles,  p.  616. 


THE   TUEORV   OF  SURPLUS    VALUE.        311 

the  desires  of  the  buyer ;  the  sum  obtained  for 
the  restricted  supply  being  the  utmost  which  the 
buyers  wouUl  consent  to  give  rather  than  go 
without  it ;  if  the  treasury  intercepts  a  part  of 
this,  the  price  cannot  be  further  raised  to  compen- 
sate for  the  tax,  and  it  must  be  paid  from  the 
monopoly  profits."  Now  it  will  be  evident,  if  our 
analysis  of  price  is  correct,  that  every  commodity 
will  be  sold  at  a  price,  which,  however  subject  to 
the  keenest  competition  in  its  final  retail  market, 
will  contain  monopoly  elements  derived  from 
the  scarcity  of  one  or  other  of  the  requisites  of 
production  at  different  stages.  Now  a  tax  im- 
posed upon  commodities  will  not  be  represented 
by  a  rise  of  prices  until  t*hese  forced  gains  have 
been  absorbed.  We  must  admit  that  the  prices 
of  these  commodities,  however  keen  the  competi- 
tion of  retailers  in  the  final  stage,  are  scarcity 
prices,  and  are  therefore  squeezable  by  taxation  to 
the  extent  of  the  forced  element  they  embody. 
Mill  admits  "that  a  tax  on  rare  and  high-priced 
wines  will  fall  wholly  on  the  owners  of  the  vine- 
yards." Why?  Not  because  the  owners  of  some 
vineyards  can  extort  a  high  rent  for  differential 
advantages  over  the  other  vineyards  contributing 
to  the  same  market.  If  the  worst  vineyards  con- 
tributing to  this  supply  paid  no  rent,  the  tax 
would  not  lie  upon  the  owners  of  better  vineyards, 
for  the  first  effect  of  the  tax  in  making  unprofit- 
able the  production  of  wine  upon  the  worst  vine- 


312        THE  ECONOMICS   OF  DISTRIBUTION. 

yards,  and  so  raising  the  margin  of  cultivation 
and  lowering  differential  rents,  will  be  checked 
and  counteracted  by  the  rise  of  price  which  would 
follow  such  a  reduction  of  supply.  This  counter- 
acting rise  of  price  would  prevent  the  worst  vine- 
yards from  passing  out  of  cultivation:  differential 
rents  would  remain  as  before,  enhanced  prices 
would  be  paid  by  consumers,  if  we  accept  for  the 
nonce  the  conventional  view  of  the  consumer  as 
a  possible  ultimate  object  of  taxation.  So  far  as 
this  enhanced  price  reduced  demand  for  the  wine, 
it  might  operate  upon  supply  and  raise  somewhat 
the  margin  of  cultivation,  but  even  then  the  tax 
would  only  partially  —  not  wholly  —  fall  upon  the 
owners  of  the  vineyards.  What  Mill  is  really 
looking  to  is  the  case  of  vineyards  producing  a 
rare  wine  under  conditions  in  which  the  worst 
lands  yield  a  high  rent.  Here  a  tax  upon  the 
price  of  the  wine  must  fall  wholly  upon  the  "forced 
gain  "  or  scarcity  rent  until  that  is  exhausted.  For 
if  the  scarcity  rent  amounted  to  £2  an  acre,  no 
tax  upon  wine  which  did  not  eat  up  the  £2  for 
the  produce  of  an  acre  would  make  either  the 
land  or  the  capital  and  labour  employed  no  longer 
profitable :  so  long  as  the  labour  and  capital 
received  subsistence  wages  and  interest  and  any- 
thing was  left  for  rent  above  the  rent  which  could 
be  got  from  converting  the  "  determinant "  vine- 
land  into  other  uses,  the  supply  would  not  be 
reduced.     If  tlie  supply  remained  as  before,  and 


TUE  THEORY  OF  SURPLUS    VALUE.       313 

the  demand  be  assumed  to  stand  unchanged,  the 
price  of  the  wine  could  not  rise. 

We  have,  therefore,  in  this  case  a  crucial  test  of 
the  allegation  that  a  tax  upon  commodities  will 
settle  upon  a  rent  of  land  which  is  represented  by 
a  monopoly  price. 

If,  therefore,  similar  rents  emerge  from  the  em- 
ployment of  certain  species  of  capital  and  labour 
entering  into  prices  like  the  monopoly  rents  of 
land,  these  two  will  be  amenable  to  taxation. 
Take  once  more  the  case  of  beer  :  if  public-house 
property  and  breweries  yield  to  their  owners  a  rate 
of  real  interest  (not  interest  on  watered  capital) 
higher  than  is  necessary  to  remunerate  the  neces- 
sary amount  of  capital  employed  in  these  pro- 
cesses, the  price  of  beer  must  be  so  high  as  to  pay 
this  monopoly  element  of  interest,  as  well  as  to 
pay  the  specific  rent  of  lands  employed  in  grow- 
ing hops  and  barley.  A  tax  upon  beer  would 
then  fall  upon  the  interest  of  brewing  and  public- 
house  property,  as  well  as  upon  monopoly  rents  of 
hop-lands. 

Although  the  special  conditions  of  the  produc- 
tion and  distribution  of  beer  give  peculiar  force 
and  emphasis  to  the  application  of  this  principle, 
the  difference  between  beer  and  other  commodities 
is  only  a  matter  of  degree,  so  far  as  the  presence 
of  the  forced  or  scarcity  element  in  price  is  con- 
cerned. If  we  took  the  price  of  bread  or  boots  or 
any  ordinary  commodity  and  traced  it  back  to  its 


314        THE  ECONOMICS   OF  DISTRIBUTION. 

constituent  parts  through  the  various  processes 
from  the  raw  materials,  we  should  find  the  differ- 
ent market-prices  containing  some  element,  how- 
ever small,  of  the  same  superiority  of  bargaining 
power  which  we  have  styled  "forced  gain."  If 
this  theory  of  Determination  of  Market-prices  is 
correct,  there  must  in  every  commodity  price  be  a 
certain  portion  which,  representing  monopoly  or 
scarcity,  is  thus  amenable  to  taxation.  It  would 
therefore  not  be  true  that  "  every  tax  on  a  com- 
modity tends  to  raise  its  price,"  save  in  so  far  as 
such  tax  exceeded  the  aggregate  of  "forced  gains" 
which  entered  into  the  price.  That  a  tax  on  the 
rent  of  land  or  upon  house-rents  containing  a  large 
element  of  land-rent  cannot  be  shifted,  but  must 
be  borne  by  the  landowner,  is  a  generally  received 
doctrine  of  economists.  It  is  also  frequently  ad- 
mitted that  a  tax  on  wages,  so  far  as  it  relates  to 
the  higher  grades  of  mental  or  educated  labour, 
which  enjoy  some  monopoly  of  opportunities, 
must  be  borne  by  these .  classes  and  cannot  be 
sliifted  on  to  other  members  of  the  community.^ 
If  tlic  same  admission  is  not  made  regarding 
interest  of  monopolies  in  capital,  it  is  only  because 
these  are  regarded  either  as  abnormal  things  or 
as  the  products  of  fortuitous  and  passing  circum- 
stances. There  is,  however,  ample  evidence  to 
show  that  economists  are  quite  aware  that  certain 
kinds  of  taxes  upon  articles  sold  at  scarcity  or 
1  Mill,  15k.  V,  Ch.  Ill,  par.  4. 


THE   TUEORY  OF  SURPLUS    VALUE.       316 

monopoly  prices  will  settle  upon  and  be  borne  by 
the  owners  of  these  monopolies.  If,  then,  we  can 
discover  similar  elements  of  unnecessary  gain  in- 
herent in  all  prices,  we  shall  recognise  a  large 
surplus  which  is  represented  in  prices  and  which 
forms  a  fund  upon  which  taxation  must  naturally 
settle. 

§  4.  The  conclusion  suggested  by  this  kind  of 
reasoning  is  that  a  tax  imposed  upon  any  class  of 
commodities  will  percolate  through  the  various 
channels  of  production,  will  be  rejected  from  all 
necessary  or  subsistence  payments  of  capital  and 
labour,  and  will,  either  directly  or  through  the 
agency  of  consumers,  settle  upon  "  forced  gains  " 
or  unearned  income. 

This  conclusion  may  appear  at  first  sight  to  be 
opposed  to  certain  well-grounded  judgments  con- 
cerning the  taxation  of  monopolies.  It  is  a  cor- 
rect and  generally  admitted  fact  that  a  tax  upon 
the  price  of  monopolised  commodities  may  have 
the  effect  of  raising  their  price,  and  it  appears  as 
if  the  monopolist,  in  this  way,  could  exercise  a 
power  to  resist  completely  the  taxation  of  his 
rents  of  monopoly.  A  closer  investigation  of  the 
matter  will,  however,  show  that  everything  de- 
pends upon  the  kind  of  tax  wliicli  is  imposed. 

A  monopolist  fixes  his  price  so  as  to  obtain  for 
himself  the  largest  net  revenue  from  sales.  He 
may  sell  a  smaller  quantity  at  a  higher  price,  or  a 
larger  quantity  at  a  lower  price.     The  price  at 


316        THE  ECONOMICS   OF  DISTRIBUTION. 

which  it  will  be  most  profitable  for  him  to  sell 
will,  in  default  of  any  tax  or  other  external  inter- 
ference, depend  upon  the  elasticity  of  demand  on 
the  one  hand,  and  the  elasticity  of  supply  upon 
the  other. 

It  can  easily  be  shown  that  the  effect  of  a  fixed 
tax  upon  monopolised  commodities  may  be  the 
sale  of  a  smaller  quantity  at  a  higher  price.  The 
simplest  test  is  that  of  a  monopoly  which  in  its 
expenses  of  production  conforms  to  the  Law  of 
Constant  Returns,  each  new  increment  of  product 
being  produced  at  the  same  expense  as  each  past 
increment. 

Take  the  case  of  a  coal  monopoly,  where  the 
mines  are  so  rich  that  a  virtually  unlimited  amount 
of  coal  can  be  produced  at  a  selling  price  of  12 
shillings  per  ton,  which  will  include  under  ex- 
penses of  production  ordinary  interest  upon  capi- 
tal and  earnings  of  management. 

The  line  XY  represents  possible  supply,  divided 
into  increments  of  1  million  tons.  While  the  cost 
per  ton  is  constant  with  every  increase  of  supply, 
the  selling  price  falls.  The  perpendicular  AB 
represents  the  selling  price  of  20  shillings  per  ton 
where  1  million  tons  are  sold.  If  2  millions  are 
sold,  the  price  is  19  shillings ;  if  3  millions,  18 
shillings.  So  the  selling  price  falls  1  shilling  on 
each  increment  of  1  million  tons,  until  we  reach  9 
million  tons,  which  can  only  be  sold  at  12  shillings, 
or  just  enough  to  defray  expenses  of  production. 


THE  THEORY  OF  SUIiPLUS   VALUE.       317 

Now,  in  order  to  ascertain  what  quantity  of 
production  and  sales  will  yield  the  largest  net 
revenue  of  monopoly  rents,  let  us  compare  the 
different  quantities  of  supply. 

If  1  million  tons  were  sold,  the  receipts  would 
be  20  million  shillings ;  deduct  expenses  of  pro- 
duction, 12  million  shillings,  at  12  shillings  per 


C 

A 

20 

latrt: 

18 

lf~~^ 

1? ] 

15" 1 

iT^ 

i5^»^ 

D 
-Y 

A 

a' 

A 

a^ 

A' 

A 

a' 

12 

A* 

1'"        2^' 


ton,  and  the  monopoly  revenue  stands  at  8  million 
shillings.  If  2  millions  were  sold,  receipts  would 
be  38  million  shillings  (19  x  2)  and  expenses  24 
millions,  yielding  a  monopoly  revenue  of  11  mill- 
ion shillings.  By  similar  calculation  the  net 
revenue  of  3  millions  is  found  to  amount  to  18 
million  shillings,  of  4  millions  to  be  20  million 
shillings :  5  millions  yields  the  same  net  revenue 
as  4  millions.     After  5  millions  a  decline  of  net 


318       THE  ECONOMICS   OF  DISTRIBUTION. 

revenue  appears;  6  million  tons  only  yielding 
18  million  sliillings  and  T  million  tons  only  14 
million  shillings. 

It  is  evident  that  a  monopolist  unhampered  by 
taxation  will  produce  4  or  5  million  tons,  selling 
them  at  a  price  of  17  shillings  or  16  shillings  per 
ton,  and  taking  on  each  ton  a  monopoly  rent  of 
4  or  5  shillings. 

Now  what  would  be  the  effect  of  imposing  a 
fixed  tax  upon  a  ton  of  coal,  with  the  view  of 
forcing  rents  of  monopoly  ?  Let  us  suppose  a  tax 
of  6  shillings  per  ton  to  be  imposed.  The  effects 
are  obvious.  In  the  first  place,  since  from  the 
standpoint  of  the  producer,  expenses  of  produc- 
tion are  now  raised  from  12  shillings  per  ton  to 
18  shillings,  no  sale  is  possible  at  a  less  price  tlian 
18  shillings.  Instead  of  selling  4  or  5  million 
tons  at  16  shillings  or  17  shillings  per  ton,  he  is 
economically  forced  to  raise  his  price  to  18  shil- 
lings and  sell  3  millions  at  that  price.  But  at 
18  shillings,  tliough  he  pays  the  enlarged  expenses 
of  production,  he  earns  no  monopoly  revenue. 
Has  the  tax  then  succeeded  in  taking  the  monop- 
oly rents  ?  No.  Just  as  it  was  not  to  his  interest 
at  the  lower  level  of  expenses,  12  shillings,  to  sell 
8  million  tons  at  that  figure,  so  at  the  artificially 
heightened  level  of  expenses',  18  shillings,  it  is  not 
his  interest  to  sell  3  million  tons  at  that  price. 
It  is  his  interest  to  sell  some  smaller  quantity  at 
a  higher  price  so  as  to  earn  monopoly  rents.     In 


THE   THEORY  OF  SURPLUS    VALUE.       ol9 

the  case  we  have  taken,  the  new  net  maximum 
revenue  of  monopoly  will  be  obtained  by  selling 
2  million  tons  at  19  shillings  per  ton. 

A  fixed  tax  upon  monopolised  commodities  will 
not  succeed  then  in  taking  the  whole  of  the  mo- 
nopoly revenue,  and  will  succeed  in  restricting 
production  so  as  to  force  consumers  to  pay  a 
higher  price,  which  shall  remain  a  monopoly  price, 
for  their  commodities. ^ 

If,  instead  of  a  production  conforming  to  the 
Law  of  Constant  Returns,  the  production  were 
subject  to  the  law  either  of  diminishing  or  in- 
creasing returns,  the  calculation  would  be  far  more 
intricate,  but  the  same  general  law  would  hold. 
Unless  the  curve  of  expenses  happened  to  vary 
directly  in  exact  proportion  and  for  an  indefinite 
extent  with  the  curve  of  demand,  so  that  the 
monopoly  element  in  price  per  ton  did  not  fall 
with  the  fall  of  selling  price,  a  fixed  tax  on  mo- 
nopolies must  have  the  effect  assigned  to  it  in  the 
instance  above  taken. 

If  we  were  able  to  take  into  accurate  account 
the  eccentricities  of  both  demand  and  supply 
curves  in  any  actual  trade,  we  should  perceive,  as 
Professor  ]\Iarshall  has  shown,  that  there  may  l)e 
a  number  of  equilibria  between  supply  and  de- 
mand,   the   prices   at  which   3-ield   an    equal  net 

1  See  Professor  Edgewortli's  note  in  the  Economic  Journal, 
June,  1898  (pp.  235-6),  for  the  mathematical  proof  of  the 
effect  of  a  specific  tax  on  monopolised  articles. 


320       THE  ECONOMICS   OF  DISTRIBUTION. 

revenue  to  the  seller.  In  such  case  a  fixed  tax 
upon  commodities  would  in  many  cases  be  evaded 
in  large  measure  by  a  monopolist  choosing  the 
equilibrium  where  the  most  restricted  supply  was 
sold  at  the  highest  price.  The  tendency  of  such 
a  tax  must  always  be  to  produce  a  restriction  of 
supply  and  a  rise  of  prices.  Professor  Marshall 
sums  up  the  matter  with  admirable  lucidity :  "  A 
tax  proportional  to  the  amount  produced  causes 
a  greater  total  loss  of  monopoly  revenue  when 
the  amount  produced  is  large  than  when  it  is 
small,  and  we  shall  find  it  causes  the  sales  which 
afford  the  maximum  revenue  to  be  somewhat 
smaller  than  before,  and  offers  an  inducement 
to  the  monopolist  to  raise  his  prices  and  con- 
tract his  sales."  ^  A  fixed  tax  upon  commodities 
is  a  "tax  proportional  to  the  amount  produced." 

But  it  must  be  borne  in  mind  that  the  partial 
ability  of  a  monopolist  to  resist  such  a  tax,  and 
the  injury  such  tax  inflicts  upon  consumers  by 
restricting  supply  and  enhancing  prices,  by  no 
means  justifies  a  general  condemnation  of  a  tax 
upon  monopolised  commodities,  but  only  of  the 
fixed  tax. 

The  failure  of  a  fixed  tax  upon  each  unit  of  sup- 
ply is  due  to  the  fact  that  while  the  value  of  the 
tax  is  fixed,  the  value  of  the  commodity  on  which 
it  falls  is  variable. 

A  tax  upon  monopolised  commodities  so  regu- 
1  Prtndples,  2(1  ed.  p.  517. 


THE  THEORY  OF  SURPLUS    VALUE.       321 

lated  as  to  take  the  same  proportion,  or  even  the 
whole,  of  the  monopoly  rent  at  each  price,  would 
not  be  open  to  valid  criticism  on  grounds  of  theory. 
But  the  application  of  such  a  tax  would  imply  the 
possibility  of  an  accurate  assessment  of  the  rela- 
tions between  monopoly  rents,  expenses  of  pro- 
duction, and  selling  prices.  An  ad  valorem  tax 
upon  the  selling  price  of  commodities  would  be 
open  to  the  same  objection,  though  in  a  less  de- 
gree, as  that  which  applies  to  a  fixed  tax  upon 
each  unit  of  supply.  Since  we  could  not  pre- 
sume the  monopoly  rent  to  vary  directly  and  pro- 
portionately with  the  selling  price,  an  ad  valorem 
tax  upon  selling  prices  might  make  it  more  profit- 
able for  a  monopolist  to  restrict  production  and 
raise  prices. 

The  scientific  basis  of  taxation  of  monopolies  is 
an  ad  valorem  tax  upon  the  monopoly  element  in 
prices.  Theoretically,  this  might  be  levied  upon 
each  unit  of  commodity  ;  practically,  it  can  only  be 
safely  and  conveniently  levied  upon  net  revenues 
of  monopoly  as  represented  in  annual  incomes. 

We  saw  liow  a  tax  placed  upon  subsistence 
wages  of  labour  was  shifted  directly  and  indirectly 
upon  those  elements  of  income  which,  not  being 
payments  necessary  to  evoke  the  use  of  the  factor 
of  production  for  which  they  were  paid,  had  no 
power  to  resist  the  tax.  What  is  true  with  regard 
to  subsistence  wages  of  labour,  is  equally  true  of 
any    other   element    in   expenses   of    production. 


322       THE  ECONOMICS   OF  DISTRIBUTION. 

Subsistence  payments  cannot  be  taxed ;  forced 
gains,  of  which  the  monopoly  element  in  price  of 
commodities  is  one  plain  instance,  cannot  resist 
taxation  properly  directed  against  it,  whether  the 
taxation  be  of  net  revenue,  or  an  ad  valorem  tax 
levied  upon  the  monopoly  gains  in  each  act  of 
sale. 

§  5.  But  forced  gains  or  scarcity  rents  only 
form  one  part  of  "  marginal  rents  "  ;  it  remains  to 
consider  the  taxability  of  the  other  part  of  mar- 
ginal rents,  and  of  the  individual  differential  rents. 

A  reference  to  the  diagram  on  p.  303  will  make 
it  clear  that  when  we  remove  from  a  marginal 
rent  any  element  of  "  forced  gain "  that  may  in- 
here in  it,  the  rest  of  that  marginal  rent  is  im- 
posed by  the  determinant  owner  of  supply,  and 
measures  the  pecuniary  inducement  which  causes 
him  to  abandon  a  differential  rent  he  might  have 
earned  in  some  other  supply.  For  example,  if  the 
marginal  rent  of  20s.  for  wheat  land  is  determined 
by  the  fact  that  some  of  this  wheat  land  above  the 
margin,  drawing  (say)  25s.,  as  wheat  land,  has 
an  alternative  use  for  pasture  land  which  woidd 
afford  a  rent  of  24s.  6(^.,  it  is  evident  that  the 
marginal  rent  of  wheat  land  depends  upon  a  dif- 
ferential rent  of  pasture  land,  and  that  any  cause 
which  raised  differential  pasture  rents  would  dis- 
turb this  margin  of  wheat  land.  Under  such 
circumstances  we  have  a  clear  answer  to  the  ques- 
tion. Can  marginal   rent  (apart  from   the  forced 


THE   THEORY  OF  SURPLUS   VALUE.       323 

gain  it  contains)  be  taxed?  A  tax  levied  on  mar- 
ginal rent  will  fall  also  upon  the  units  of  supply 
earning  differential  rents.  If  the  marginal  rent 
of  wheat  land,  20s.,  is  taxed  Is.  per  acre,  the 
determinant  portion  of  supply,  land  earning  previ- 
ously a  rent  of  25s.,  is  now  reduced  to  24:S.  This 
land,  ex  hypothesi.,  possesses  an  alternative  use  for 
which  it  can  earn  2is.  Qd.  ;  it  will  therefore  cease 
to  contribute  to  the  supply  of  wheat  land,  and 
convert  itself  into  pasture  at  24s.  6c?.,  thus  re- 
ducing the  total  supply  of  wheat  land,  and  raising 
the  margin  to  a  nominal  rent  of  21s.  by  the  action 
of  some  other  portion  of  supply  which  now  be- 
comes the  determinant.  An  attempt  thus  to  tax 
the  marginal  rent  for  some  specific  supply,  will 
have  the  necessary  effect  of  driving  some  portion 
of  supply  into  an  alternative  use,  and,  by  reducing 
the  specific  supply,  will  enable  the  whole  of  the 
contributors  to  that  supply  to  evade  the  tax. 

What  holds  of  specific  margins  of  land,  holds 
similarly  of  specific  margins  of  capital  and  labour. 
A  tax  upon  ''  marginal  rents  "  can  only  lie  on  con- 
dition that  the  alternative  employment  is  similarly 
taxed.  A  tax  upon  the  rent  of  marginal  wheat 
land  cannot  be  resisted  if  a  similar  tax  falls  upon 
pasture  rents  and  rents  for  other  uses  of  land. 

The  fact  that  the  marginal  rent  for  one  specific 
use  of  land  depends  upon  the  rents  for  other  uses, 
proves  that  the  markets  for  land-uses,  though 
conveniently  separated  for   certain   purposes,  are 


324       THE  ECONOMICS   OF  DISTRIBUTION. 

organically  related  at  certain  points,  forming  a 
single  supply  of  land. 

So  far  then,  as  taxability  is  concerned,  the  mar- 
ginal rent  (forced  gains  excepted)  may  be  treated 
as  differential  rents,  and  the  real  issue  relates  to 
the  taxability  of  these  differential  rents. 

§  6.  It  is  generally  agreed  by  economists  that 
differential  rents  of  land  cannot  resist  taxation. 
A  tax  of  10s.  or  19s.  in  the  pound  upon  all  rent 
of  land  could  not  be  transferred  by  the  landowner 
to  his  tenant  in  rise  of  rent  or  to  any  other  person 
with  whom  he  has  dealings. 

How  far  is  this  economic  precept  applicable  to 
capital  and  labour  ?  In  so  far  as  our  gradation 
of  investments  is  valid,  an  ad  valorem  tax  upon 
differential  and  margmal  interests  could  not  be 
resisted,  for  these  are  not  necessary  motives  to  the 
application  of  capital  in  the  directions  to  which  it 
is  actually  applied.  Looking  to  the  real  and  not 
the  money  forms  of  capital,  we  must  place  it  upon 
precisely  the  same  footing  with  land  as  regards 
taxability.  Of  land  it  has  been  said  that  differ- 
ential rents  cannot  resist  taxation,  if  the  tax  be 
levied  upon  all  rents  for  all  uses  of  land.  For  so 
long  as  any  rent  remains,  no  land  will  be  with- 
drawn from  supply.  The  wliole,  however,  of 
these  differential  rents  of  land  could  not  advan- 
tageously be  taken,  because  some  minimum  dif- 
ferential rent  is  necessary  to  induce  the  landowner 
to  put  his  land  to  its  best  economic  use.     It  is 


THE  THEORY  OF  SURPLUS    VALUE.       325 

necessary  to  preserve  some  inducement  sufficient 
to  persuade  the  owner  of  good  vine-land  to  apply 
his  land  to  this  purpose  rather  than  to  wheat  grow- 
ing or  some  other  less  productive  use. 

Similarly  with  differential  and  marginal  rents 
of  capital.  If  an  attack  was  made  upon  a  specific 
kind  of  capital  drawing  high  marginal  and  differ- 
ential rents,  by  imposing  a  tax  either  upon  the 
estimated  forced  element  of  price  or  upon  the 
net  surplus  revenue,  this  tax  might  be  evaded, 
supposing  that  some  of  this  capital  could  be  di- 
verted without  much  waste  to  an  alternative  use 
nearly  as  profitable  where  it  would  not  be  taxed. 
If  the  capital  engaged  in  brewing  earned  a  rate  of 
profit  5%  higher  than  any  of  the  owners  could 
get  in  alternative  investments  open  to  them, 
almost  the  whole  of  that  surplus  rent  could  be 
taken  by  taxation.  But  if  some  portion  of  that 
capital  were  capable  of  being  transferred  with  in- 
considerable loss  to  another  use  almost  as  profit- 
able, a  special  tax  on  brewing  profits  would  not  lie. 

In  a  progressive  condition  of  industr}'^  this  tax- 
ability would  not  generally  depend  upon  the 
adaptability  of  existing  forms  of  capital  to  some 
other  use,  but  upon  the  alternative  employment 
open  to  the  new  savings  which  might  be  engaged 
in  increasing  the  real  capital  of  the  brewing  trade. 

In  capital,  as  in  land,  differential  rents  can  only 
be  safely  taken  by  taxation,  applied,  not  specifi- 
cally, but  generally.     A  general  tax  imposed  upon 


826        THE  ECONOMICS   OF  DISTRIBUTION. 

all  interest  above  subsistence  rate  will  lie  without 
disturbance  of  industry,  provided  it  is  imposed  in 
accordance  with  the  principle  evolved  in  our  in- 
vestigation of  taxation  of  monopoly  prices.  The 
whole  of  differential  rents  of  capital  could  not, 
however,  be  taken  by  taxation.  If  the  special 
profits  of  a  particular  brewery  were  derived  from 
a  closer  monopoly  of  "tied  houses,"  this  extra  gain 
could  doubtless  be  taxed;  such  gain,  however, 
would  not  properly  be  a  differential  rent  but 
rather  a  "  forced  gain  "  or  "  scarcity  rent "  made 
in  a  restricted  market  by  means  of  monopoly 
prices  for  beer.  If  the  brewery  was  really  com- 
peting in  a  market  with  other  breweries,  its  higher 
profit,  or  differential  rent  (if  not  disguised  earn- 
ings of  superior  management),  would  be  derived 
from  economics  of  large-scale  production  with  the 
use  of  the  best  plant  and  labour.  An  attempt  to 
take  by  taxation  the  whole  of  this  advantage  would 
diminish  the  incentive  of  capitalists  to  make  tlie 
most  productive  use  of  their  capital.  In  a  word, 
the  superior  differential  productivity  of  capital, 
though  not  of  necessity  rightly  attributed  to  skill 
of  management  (which  is  but  one  factor  in  produc- 
tivity), is  conditioned  by  such  skill ;  unless  the 
capital  has  some  element  of  differential  interest 
secured  to  it,  there  is  danger  it  may  not  be  fully 
utilised.  This  consideration  involves  no  general 
denial  of  the  taxability  of  differential  interest  of 
capital,  but  merely  enforces  the  retention  of  what- 


THE   THEORY  OF  SURPLUS    VALUE.        327 

ever  minimum  inducement  in  the  shape  of  liigher 
interest  (or  profit)  may  be  found  necessary  to  pro- 
mote the  most  economical  use  of  capital. 

A  tax  rightly  adjusted  so  as  to  take  even  99% 
of  the  net  revenue  derived  from  such  differential 
rents  could  not  be  resisted,  and  would  have  no 
effect  in  disturbing  the  application  of  existing 
capital,  or  the  saving  for  the  establishment  of  new 
capital.  Differential  rents  are  no  necessary  eco- 
*nomic  motive  to  saving  ;  they  do  not  enter  into 
the  market-price  of  saving,  which  is  measured 
from  the  cost  or  the  utility  of  the  marginal  saver, 
who  is  willing  to-day  to  save  for  some  2^%. 

§  7.  Now  let  us  turn  to  wages  of  labour.  Mar- 
ginal class  wages,  so  far  as  they  do  not  consist 
of  "  forced  gains  "  or  "  scarcity  rents  "  artificially 
maintained,  depend  upon  the  option  which  some 
labourers  possess  to  take  a  differential  rent  in 
some  other  trade.  The  transferability  of  some 
part  of  a  given  labour-market  from  one  employ- 
ment to  another,  is  positively  easier  and  freer  than 
in  the  case  of  land  and  existing  forms  of  capital, 
so  that  the  question  easily  appears  to  resolve  itself 
into  that  of  a  general  power  to  tax  differential 
wages  over  the  whole  field  of  labour ;  in  otlier 
words,  an  income  tax  on  wages  above  subsistence 
margin. 

So  far  as  a  differential  wage  is  really  a  wage  of 
superior  skill  or  productivity,  and  not  a  scarcit}" 
wage  maintained  by  some    artilicial  ordering  of 


328       THE  ECONOMICS   OF  DISTRIBUTION. 

the  market,  it  appears  to  stand  on  a  different  foot- 
ing from  other  differential  rents  with  regard  to 
the  power  to  resist  taxation. 

It  is  even  commonly  supposed  that  such  a  tax 
would  be  defeated  by  a  refusal  of  labourers  to 
apply  their  full  productive  power  unless  the  full 
rent  of  individual  productivity  were  secured  to 
them.  But  closer  scrutiny  indicates  that  no  such 
general  judgment  can  be  pronounced.  At  first 
sight,  it  doubtless  seems  as  if  a  man,  who  gives  out 
twice  as  much  productive  power  in  a  day's  work  as 
another,  must  have  twice  as  much  secured  to  him 
in  real  wages,  and  that  he  can  keep  these  wages 
against  all  attempts  to  tax  them.  But  is  this  nec- 
essarily true  ?  Suppose  A,  B,  C  are  three  work- 
ers in  a  trade,  and  A  produces  a  product  30,  B  20, 
and  C  15 ;  if  a  tax  amounting  to  the  value  of  2 
were  placed  on  B's  wage,  and  one  of  6  on  A's 
wage,  would  they  necessarily  withhold  part  of 
their  labour-power?  To  argue  that  they  necessa- 
rily would  withhold,  is  to  make  productivity  the 
sole  determinant  of  value  and  price,  and  to  ignore 
effort.  The  subjective  basis  of  endurance  enters 
in  as  a  chief  determinant  of  supply,  and  requires 
that  certain  units  of  labour-power,  even  in  the 
same  market,  shall  be  remunerated  at  a  higher  rate 
than  others.  This  does  not  contravene  the  princi- 
ple of  an  equal  price  for  an  equal  quantity  in  a  mar- 
ket. What  is  really  bought  in  the  labour-market, 
is  not  the  objective  units  of  labour-power  for  which 


THE   THEORY   OF  SURPLUS    VALUE.       329 

the  wage  is  nominally  paid,  —  the  piece  work  or 
the  hour,  —  but  the  subjective  or  vital  effort  which 
underlies  it.  The  subjective  effort  of  the  deter- 
minant owner  of  labour-power  in  a  given  supply 
really  determines,  from  the  supply  side,  the  price 
per  unit  of  the  whole  supply,  the  supply  price 
being  the  result  of  his  bargaining  with  the  repre- 
sentative of  marginal  utility  on  the  demand  side. 

In  the  case  taken  above,  the  subjective  effort  of 
C  may  be  the  determinant  on  the  supply  side,  and 
his  bargaining  with  the  marginal  buyer  may  have 
fixed  a  price  per  unit  of  labour.  If,  now,  B  can 
produce  one-third  more  units  of  labour  in  a  day, 
and  A  twice  as  many,  with  the  same  amount  of 
subjective  effort  as  C  gave  out  in  producing  15, 
they  take  a  differential  rent  of  5  and  15  respec- 
tively. But  it  by  no  means  follows  that  they 
could  resist  a  tax  which  reduced  this  rent  by  2  and 
6 ;  for  5  and  15  are  not  necessarily  the  sums  they 
insist  upon  receiving  as  conditions  of  giving  out 
the  same  subjective  effort  as  C  gave  out.  Some- 
thing more  than  C  receives  they  must  receive,  or 
they  will  reduce  their  objective  productivity  to 
the  level  of  C,  but  the  "  how  much  "  is  a  problem 
separately  determinable  in  each  case. 

In  some  kinds  of  work  it  might  be  the  case  that 
a  man  will  consent  to  give  out  his  superior  energy 
or  skill  for  a  wage  which  is  not  proportionately 
higher  than  the  wage  of  the  marginal  worker  in 
his  trade.     In  other  cases,  the  greater  intensity  or 


330        THE  ECONOMICS   OF  DISTRIBUTION. 

skill  can  only  be  evoked  by  a  fully  proportionate 
increase  of  wage.  No  general  principle  could 
therefore  be  applied  in  taxation  of  differential 
wages.  The  taxability  would  vary,  not  only  with 
the  varying  character  and  conditions  of  the  work, 
but  even  with  the  individual  nature  of  the  worker, 
and  with  the  character  of  the  wants  he  used  the 
later  increments  of  his  income  to  satisfy.  In  many 
kinds  of  work  the  utmost  intensity  of  exertion  can 
only  be  evoked  by  a  rate  of  payment  even  higher 
than  what  is  paid  for  an  equal  product  achieved 
by  slower  and  less  intense  exertion,  —  a  fact  recog- 
nised in  various  schemes  of  task  or  piece  wages,  as 
also  in  special  rates  for  overtime.  In  other  kinds 
of  work  less  disagreeable  or  exhausting,  a  capable 
worker  might  consent  to  express  his  capability, 
even  if  he  could  not  reap  the  full  advantage  of  his 
superiority  over  the  least  effective  labourer  by  a 
correspondingly  higher  wage. 

We  must  always  keep  clearly  in  mind  the  real 
nature  of  these  "rents  of  ability."  It  is  only 
when  we  take  the  individual  man  or  a  portion  of 
his  labour-time  for  our  standard  of  measurement, 
that  the  rate  of  remuneration  seems  differential. 
If  we  regard  the  worker  as  a  seller  of  productive 
efficiency,  the  one  who  sells  more  than  another  of 
his  commodity,  or  who  sells  a  better  quality,  natu- 
rally gets  a  correspondingly  larger  amoiiut  of  pay. 
If,  however,  wc  retain  tlio  idea  of  differential  rents 
of  labour,  we  must  admit  that  they  arc  not  amen- 


THE    THEORY  OF  SURPLUS    VALUE.       331 

able  to  taxation  in  the  same  way  and  to  the  same 
degree  as  differential  rents  of  land. 

§  8.  The  difference  whicli  manifests  itself  in  the 
taxability  of  differential  rents  of  labour  on  the  one 
hand,  and  of  land  and  capital  on  the  other,  is  not 
difficult  to  understand. 

Differential  rents,  beyond  a  bare  minimum,  are 
not  economic  inducements  to  owners  of  land  and 
capital  to  apply  these  factors  of  production ;  for 
existing  forms  of  land  and  capital  a  minimum  rent 
and  profit  suffices  to  retain  their  economic  service, 
and  though  new  capital  is  only  brought  into  exist- 
ence by  a  certain  subsistence  rate  of  interest,  no 
higher  rate  for  any  special  purpose  is  an  economic 
motive  of  saving. 

But  labourers  will  withhold  part  of  their  pro- 
ductive power  unless  some  differential  wage  of 
ability  is  secured  for  them.  Inanimate  nature  has 
no  ability  to  withhold  its  continuous  output  of 
productive  powers  ;  the  owner  of  a  more  fertile 
field,  who  withheld  its  use  because  its  differential 
rent  was  taxed,  would  be  cutting  his  own  throat, 
unless  the  tax  swallowed  the  entire  economic  rent. 
The  value  of  such  supply  is  determined  on  the  sup- 
ply side  by  natural  scarcity.  Where  the  supply 
depends  upon  voluntary  effort,  as  in  the  supply  of 
labour-power,  the  option  to  withhold  enables  the 
owner  to  make  conditions  which  shall  secure  for 
him  a  differential  rent,  some  indeterminate  propor- 
tion of  which  must  be  even  secure  against  taxation. 


332       THE  ECONOMICS   OF  DISTRIBUTION. 

§  9.  Our  analysis  of  the  taxability  of  the  vari- 
ous payments  made  out  of  money  spent  on  com- 
modities, resolves  these  payments  into  necessary 
expenses  of  production,  subsistence  payments  for 
use  of  labour  and  capital,  which  cannot  be  taxed, 
and  marginal  and  differential  rents  which  are  in 
various  degrees  and  to  various  extents  amenable 
to  taxation.  Forced  gains  or  scarcity  rents  to- 
gether with  differential  rents  of  land  and  capital 
have  no  power  to  resist  direct  taxation  imposed 
upon  them  as  elements  in  income.  Forced  or 
scarcity  rents  of  labour,  together  with  certain  por- 
tions of  differential  rents  of  labour,  are  also  in 
theory  directly  taxable. 

The  general  tendency  of  this  analysis  is  to 
justify  the  economic  superiority  of  taxation  upon 
incomes  or  net  revenues  over  taxation  imposed 
upon  special  classes  of  commodities  or  upon  special 
classes  of  rents  or  profits. 

A  general  income  tax,  graduated  upon  the  sup- 
position that  the  proportion  of  unearned  and  there- 
fore economically  taxable  income  varies  directly 
with  the  absolute  size  of  incomes,  on  the  one 
hand,  escapes  the  supreme  difficulty  of  discrimi- 
nation of  the  origins  of  special  forms  of  gain,  and, 
on  the  other  hand,  can  be  shown  to  have  a  genu- 
ine, rapid,  and  accurate  tendency  to  discover  and 
settle  upon  the  various  portions  of  incomes  which 
are  unearned  in  the  sense  that  they  furnish  no 
necessary  inducement  to  owners  of  factors  of  pro- 


TUE  THEORY  OF  SURPLUS   VALUE.        333 

duction  to  put  these  factors  to  their  best  economic 
use. 

But  while  our  investigation  of  the  incidence  of 
taxation  exhibits  the  superior  economy  of  direct 
taxes  upon  monopoly  revenues  or  other  unearned 
elements  in  income  wherever  they  can  be  ascer- 
tained and  measured,  and  approved  a  general  grad- 
uated income  tax  upon  the  ground  that  it  will 
discover  and  settle  upon  such  elements  of  income, 
the  condemnation  of  specific  or  even  of  ad  valorem 
taxes  upon  commodities  must  not  be  misunderstood. 
We  have  seen  that  a  monopolist  appears  to  exer- 
cise a  power  to  resist  both  these  latter  forms  of 
taxation  of  monopolised  commodities  by  restrict- 
ing production  and  raising  prices.  By  raising 
prices  he  appears  to  shift  a  portion,  if  not  the 
whole,  of  the  tax  he  nominally  pays,  on  to  consum- 
ers. But  following  the  line  of  reasoning  laid 
down  in  our  discussion  of  the  attempt  to  tax  sub- 
sistence wages  for  an  old  age  pension  scheme,  we 
perceive  that  such  enhanced  prices  paid  by  con- 
sumers living  on  subsistence  wages  or  subsistence 
rate  of  interest,  have  the  effect  of  raising  the 
money  payments  for  subsistence,  and  thus  of  trans- 
ferring the  tax  up  to  other  persons  who  must 
eventually  pay  it  out  of  unearned  elements  of 
income.  To  shift  a  tax  upon  to  "  the  consumer," 
as  we  have  seen,  is  no  final  determinant  of  inci- 
dence :  a  tax  must  always  be  deemed  to  settle 
upon  some  element  of  income  ;  the  power  of  sub- 


334       THE  ECONOMICS   OF  DISTRIBUTION. 

sistence  payments  to  resist  taxation  we  have  seen 
is  absolute  so  long  as  there  exist  unearned  ele- 
ments of  income  upon  which  they  can  be  placed. 
The  particular  monopolist,  therefore,  can  only  re- 
sist specific  or  ad  valorem  taxation  of  his  monopo- 
lised articles  by  imposing  the  tax  upon  the  unearned 
incomes  of  certain  classes  of  consumers,  and  not 
by  distributing  it  over  all  classes  of  consumers. 
The  same  general  principle  applies  to  all  taxation 
of  commodities,  monopolised  or  free :  no  such  tax 
can  settle  upon  incomes  which  are  subsistence  pay- 
ments for  factors  of  production,  until  all  forms  of 
unearned  income  have  been  exhausted. 

The  chief  condemnation  of  such  forms  of  indi- 
rect taxation  is  not  that  they  are  liable  to  be  paid 
indiscriminately  by  rich  and  poor,  by  those  who  can 
and  those  who  cannot  bear  them,  but  that  they 
tend  in  many  cases  by  checking  production  to 
restrict  the  most  efficient  use  of  factors  of  pro- 
duction, and  so  to  decrease  the  general  output  of 
commodities. 

If  this  analysis  be  correct,  the  practical  impor- 
tance of  its  conclusions  is  very  great.  By  indi- 
cating the  existence  of  a  vast  "  surplus  "  of  rents 
analogous  to  the  economic  rent  of  land  in  its 
taxability,  it  strengthens  immensely  the  economic 
means  of  social  progress.  By  exploding  two  fal- 
lacious notions,  that  taxes  are  paid  by  the  poorer 
classes  of  the  working  population,  and  that  high 
taxation  is  injurious  to  trade,  our  analysis  removes 


THE    THEORY   OF  SURPLUS    VALUE.        335 

chief  barriers  to  that  increase  of  taxation  and  of 
wise  public  expenditure  which  are  essential  to  a 
sound  progressive  social  policy. 

§  10.  Differential  rents  play  so  considerable  a 
part  in  determining  the  inequality  of  incomes  in 
an  industrial  society  that  it  may  be  well  to  append 
to  this  discussion  of  their  taxabilit}^  some  consid- 
erations of  a  more  general  character. 

A  progressive  social  economy  is  by  no  means 
confined  to  the  difficult,  sometimes  hazardous,  and 
always  wasteful  processes  of  taxation  in  order  to 
procure  for  society  some  of  these  differential  pay- 
ments which  are  shown  not  to  be  necessary  in- 
ducements to  their  recipients  to  take  part  in 
production.  More  enlightened  methods  of  pro- 
duction, increased  equality  of  economic  ojDpor- 
tunities,  organisation  of  employers  or  of  workers, 
will  often  succeed  in  effecting  large  reductions 
of  differential  rents.  In  respect  of  land  this  was 
seen  by  Ricardo  and  explicitly  stated  by  J.  S. 
Mill,i  who  argued  that  improvements  of  agri- 
cultural science  or  of  means  of  carriage  which 
increased  or  rendered  more  available  the  output 
of  more  fertile  farms  would,  by  rendering  it  no 
longer  profitable  to  work  farms  on  the  margin 
of  cultivation,  raise  that  margin  and  so  reduce 
differential  rents.  In  similar  fashion  the  differ- 
ential rents  or  interests  of  capital  may  be  reduced 
by  such  organisation  of  employers  or  of  workers 
1  Principles.  Hk.  IV,  Ch.  Ill,  §  4. 


836       THE  ECONOMICS   OF  DISTRIBUTION. 

as  throws  a  larger  proportion  or  the  whole  of  a 
trade  into  the  hands  of  the  largest,  best-equipped, 
and  most  profitable  firms. 

Where  an  organisation  of  employers  by  organis- 
ing a  syndicate  or  a  trust  achieves  this  result  by 
weeding  out  the  weaker  mills,  it  commonly  suc- 
ceeds in  preventing  this  economy  of  differential 
rents  from  passing  to  the  consuming  public  in  the 
shape  of  lower  prices,  and,  instead,  substitutes  a 
monopoly  or  scarcity  rent  for  these  differential 
rents.  But  none  the  less  is  it  true  that  this 
"weeding  out"  or  "crushing  out"  of  feebler  com- 
peting firms  signifies  a  reduction  of  the  differ- 
ential rents  which  were  formerly  necessary  to 
keep  the  requisite  supply  of  capital  in  operation. 
The  more  far-sighted  labour  leaders  are  quite 
aware  that  their  true  interests  lie  in  promoting 
this  same  improvement  of  trade  organisation,  pro- 
vided that  they  can  maintain  among  employers 
such  competition  as  will  enable  them  to  take  in 
a  rise  of  wages  the  reduction  of  differential  rents. 

This  policy,  indeed,  forms  one  of  the  stoutest 
arguments  in  favour  of  that  attempt  to  acquire 
by  legislation,  or  by  trade  unionism,  a  recognised 
standard  of  subsistence,  of  hours  of  labour,  and 
of  other  terms  of  employment.  This  movement 
for  better  conditions  of  employment,  implying  a 
rise  in  current  expenses  of  production  which  seems 
to  press  unendurably  upon  the  weaker  employers, 
is  thus  seen  to  be  a  positive  instrument  of  eco- 


TIIE  THEORY  OF  SURPLUS   VALUE.       337 

nomic  progress.  Upon  this  topic  Mr.  and  Mrs. 
Webb  thus  write  :  "  It  is  obviously  to  the  inter- 
est of  the  trade  union  so  to  fix  the  common  rule 
as  to  be  constantly  '  weeding  out '  the  old-fash- 
ioned or  stupid  firms,  and  to  concentrate  the 
whole  production  in  the  hands  of  the  more  effi- 
cient '  captains  of  industry,'  who,  however,  have  to 
lower  the  cost  of  the  product  without  lowering  the 
wage.  Thus,  so  long  as  the  more  advantageously 
worked  establishments  in  the  trade  are  not  work- 
ing up  to  their  full  capacity,  or  can,  without  losing 
this  advantage,  be  further  enlarged,  the  trade 
union  could  theoretically  raise  its  common  rule, 
to  the  successive  exclusion,  one  after  another,  of 
the  worst  employers,  without  affecting  price  or  the 
consumers'  demand,  and  therefore  without  dimin- 
ishing the  area  of  employment.  By  thus  '  raising 
the  margin  of  cultivation,'  and  simultaneously  in- 
creasing the  output  of  the  more  advantageously 
situated  establishments,  this  device  of  the  com- 
mon rule  may  accordingly  shift  the  boundary  of 
that  part  of  the  produce  which  is  economically  of 
the  nature  of  rents,  and  put  some  of  it  into  the 
pockets  of  the  workmen."  ^ 

The  failure  of  most  economists  to  recognise  the 
large  proportion  of  "forced  gains"  and  scarcity,  or 
differential  rents,  which  are  included  in  the  net 
profits  of  a  trade,  is  chiefly  respo)isible  for  the  tone 
of  disparagement  in  which  even  the  most  liberal 
1  Indtistrial  Democracy,  Vol.  II,  pp.  729-30. 


338       THE  ECONOMICS   OF  DISTRIBUTION. 

mindetl  amongst  them  speak  of  the  economic  effi- 
cacy of  trade-union  efforts  to  raise  wages.  That 
wages  at  any  given  time  are  fixed  absolutely  by 
the  operation  of  economic  laws  which  are  immuta- 
ble, few  would  now  contend,  but  even  Jevons  and 
Professor  Marshall,  while  generally  favourable  to 
trade  unionism,  are  apt  to  deny  its  validity  when 
they  come  to  apply  economic  reasoning.  "  The 
power  of  unions  to  raise  general  wages  by  direct 
means  is  never  great,"  writes  Professor  Marshall,^ 
while  Jevons  boldly  affirmed  that,  though  organisa- 
tion might  enable  one  class  of  workers  to  increase 
this  wage,  this  increase  was  paid  for  by  other 
classes  in  their  capacity  of  consumers.  ^  The  gen- 
eral tendency  is  to  insist  that  trade  unionism  is 
confined,  so  far  as  efficacy  in  raising  wages  is  con- 
cerned, to  securing  rises  that  are  already  justified 
by  increased  prices  and  profits,  and  to  obtaining 
such  rises  as  are  attended  by  a  correspondent  in- 
crease of  productivity  of  labour,  such  increase,  for 
example,  as  is  sometimes  claimed  to  follow  a  rais- 
ing of  the  standard  of  comfort. 

Our  analysis,  if  it  be  correct,  involves  the  recog- 
nition of  a  great  fund  of  surplus  profits,  which  is 
available  for  higher  wages,  as  it  is  also  amenable 
to  taxation,  and  wliich  can  be  obtained  by  a  suffi- 
ciently strong  pressure  of  trade  unionism. 

In  other   words,   forced  gains  and  differential 

^  Eleinenta  of  Economics  of  Imlnstnj  (1892),  pp.  407-8. 
2  The.  I'^tate  ill  lielcUiou  to  Labour,  pi).  1U5-7. 


THE   THEORY  OF  SUIiJ'LUS    VALUE.       339 

rents  of  capital  are  not  permanently  necessary 
payments  to  the  owners  of  capital  who  take 
them,  and  may  be  transferred,  either  to  the 
public  by  taxation,  or  to  the  workers  by  a  rise 
of  wages.  It  is  not  difficult  to  see  that  differ- 
ential rents  of  labour,  mental  or  manual,  may 
be  reduced  or  transferred  in  similar  ways.  Pri- 
mary public  education  has  liad  a  plainly  recognised 
effect  in  reducing  the  differential  rents  of  ordinary 
clerical  employments.  Technical  education,  in  so 
far  as  it  extends  to  larger  social  areas  the  oppor- 
tunity of  successfully  learning  high-skilled  and 
well-paid  trades,  makes  in  the  same  direction.  In 
fact,  every  enlargement  of  education,  in  so  far  as  it 
makes  for  greater  equality  of  economic  opportuni- 
ties, tends  to  reduce  differential  rents  of  employ- 
ment and  likewise  the  marginal  specific  rents  which 
are  seen  to  depend  upon  them.  If  the  marginal 
physician  is  better  paid  than  the  marginal  corn- 
porter,  it  is  not  because  of  any  greater  inherent 
skill  in  the  former  calling  which  gives  its  services 
a  higher  marginal  value.  We  pay  the  marginal 
phyvsician  a  relatively  high  fee  because  the  present 
distribution  of  economic  and  educational  oppor- 
tunities is  such  that  only  a  small  proportion  of 
the  population  can  equip  their  sons  for  competi- 
tion in  that  market,  hence  the  competitors,  by 
fairly  close  organisation,  can  maintain  a  high  rate 
of  piece  wages.  The  high  rate  does  not  depend 
on  a  natural  scarcity  of  high  skill.      When  it  is 


340       THE  ECONOMICS   OF  DISTBIBUTION. 

made  as  easy  to  any  lad  who  has  the  desire  to  pre- 
pare himself  for  medicine  as  it  is  to  become  a  dock 
labourer,  the  .piece  wage  for  the  former  work  will 
be  as  low  and  probably  lower  than  the  piece  wage 
for  the  latter,  so  far  as  the  marginal  labourer  is 
concerned.  Even  those  high  fees  which  pro- 
fessional talent  of  a  distinguished  rank  can  draw 
will  be  greatly  cut  down  when  every  career  is 
open  to  natural  talent  from  any  social  or  economic 
grade.  A  distinguished  specialist  in  surgery  may 
now  take  a  fee  of  <£1000  for  a  single  delicate  opera- 
tion. He  will  not  now  do  it  for  less  because  he 
can  actually  get  this  sum.  But  his  ability  to  get 
it  depends  on  two  facts,  one  relating  to  supply, 
the  other  to  demand,  neither  of  which  is  a  per- 
manent necessity.  The  first  fact  consists  in  the 
limitation  of  supply  of  finest  surgical  talent  by 
reason  of  the  exclusion  of  most  children  from  any 
opportunity  to  discover  such  a  talent,  to  educate 
it,  and  to  enter  upon  a  medical  career.  Destroy 
this  artificial  limitation  of  supply,  and  instead  of 
one  surgeon  able  and  willing  to  do  this  job  we 
should  have  three  or  four  upon  a  fairly  equal  level 
of  skill  and  reputation,  whose  competition  direct 
or  indirect,  would  bring  down  the  fee  from  £1000 
to  say  <£20.  On  the  other  side,  there  is  the  fact 
of  the  existence  of  a  certain  number  of  very  wealthy 
people  who,  drawing  large  elements  of  unearned 
income  from  various  rents,  can  afford  to  pay 
.£1000.     Every  equalisation   of   economic   oppor- 


THE  THEORY  OF  SURPLUS   VALUE.       341 

tuniiies,  each  application  of  sound  principles  of 
progressive  taxation,  will  reduce  this  number,  and 
reduce  the  effective  demand  for  work  at  such  a 
price. 

Thus  it  is  seen  that  there  is  nothing  inherent  or 
immutable  in  these  differential  rents  of  ability 
which  are  sometimes  regarded  as  a  necessary  re- 
ward for  superior  skill  which  cannot  be  refused  or 
materially  reduced. 

§  11.  I  have  for  convenience  reserved  for  a  spe- 
cial, separate  consideration  those  payments  to  which 
Professor  Marshall  gives  the  name  "quasi-rents." 
He  has  done  more  than  any  other  economic  writer 
to  break  down  the  barrier  which  has  separated  land 
from  other  factors  of  production,  and  to  extend 
the  name  and  the  application  of  the  Law  of  Rent. 
The  rent  of  land  is  to  him  "no  unique  fact,  but 
simply  the  chief  species  of  a  large  genus  of  eco- 
nomic phenomena,"  and  he  recognises  "  that  there 
is  a  continuous  gradation  from  the  true  rent  of 
those  free  gifts  which  have  been  appropriated  by 
man,  through  the  income  derived  from  permanent 
improvements  of  the  soil,  to  those  yielded  by  farm 
and  factory  buildings,  steam  engines,  and  less  dur- 
able goods."  1 

A  careful  consideration  of  the  chapters  in  which 
the  theory  of  quasi-rents  receives  full  treatmenl,^ 
shows  that  the  quasi-rents  are  analogous,  not  to 

1  Bk.  VI,  Ch.  IX. 

2  (Bk.  V,  Chs.  VIII,  IX,  and  Bk.  VI,  Ch.  IX.) 


342       THE  ECONOMICS   OF  DISTRIBUTION. 

differential  rents  of  land,  but  to  scarcity  rents. 
First  to  illustrate  his  meaning  he  takes  the  cases 
of  a  find  of  meteoric  stones  and  of  the  ownership 
of  the  pictures  of  a  dead  artist.  Here  we  have 
an  absolute  monopoly  selling  at  a  monopoly  price 
and  yielding  what  Marshall  terms  a  "true  rent." 
A  tax  upon  such  articles  falls  entirely  on  their 
owners.  If,  however,  by  labourers'  search  other 
meteoric  stones  could  be  found,  or  if  we  were  deal- 
ing with  the  pictures  of  a  living  artist  who  still 
continued  to  produce,  the  monopoly  price  or  rent 
would  only  last  for  a  short  season,  since  it  would 
serve  to  stimulate  such  exertion  and  would  equate 
supply  and  demand  at  ordinary  expenses  of  pro- 
duction. But  while  the  higher  price  lasted,  the 
stones  or  pictures  might  be  regarded  as  yielding  a 
quasi-rent.  In  other  words,  a  quasi-rent  or  mo- 
nopoly element  would  figure  in  short  period  or 
market-price,  and  would  gradually  disappear  as 
the  period  was  lengthened  and  what  is  commonly 
termed  a  normal  price  was  reached.  Any  supply 
of  highly  specialised  capital,  ability,  or  labour, 
which  cannot  be  quickly  and  widely  replenished, 
may  for  a  season  stand  in  the  position  of  being 
able  to  take,  in  addition  to  ordinary  rate  of  profit, 
a  quasi-rent  which  must,  however,  disappear  when 
the  lapse  of  time  brings  into  the  market  a  suffi- 
cient number  of  new  forms  of  specialised  capital 
and  labour. 

Now  it  is  evidoiit  that  these  quasi-rents  marking 


THE   TUEOltY  OF  SURPLUS   VALUE.       343 

short-time  monopolies  are  nothing  else  than  the 
more  variable  forms  of  monopoly  or  scarcity  rents 
of  capital  and  labour,  and  it  is  not  easy  to  under- 
stand why  the  disparaging  epithet  "  quasi "  should 
be  appended  to  them.  So  long  as  they  exist  they 
are  as  true  rents  as  any  land-rents,  nor  are  they 
necessarily  of  brief  duration  :  highly  specialised  la- 
bour and  capital  are  frequently  able,  by  checking 
investments  of  outside  capital  and  labour,  to  hold 
up  market-prices  above  "  marginal  expenses  of 
production "  for  long  periods.  Some  of  these 
monopolies  may  be  as  stable  and  as  strong  as 
the  monopolies  of  natural  resources  which  are 
admitted  to  draw  true  rents. 

It  appears  that  these  quasi-rents  are  simply  less 
enduring  forms  of  monopoly  rent.  The  test  of 
rent  commonly  accepted  is  this,  Will  it  bear  a 
tax  ?  Marshall  asserts  in  one  passage  that  wealth 
drawing  quasi-rents  is  taxable.  "A  tax  on  any  set 
of  things  that  are  already  produced  falls  exclu- 
sively on  the  owners  of  those  things,  if  it  is  not  ac- 
companied by  a  tax,  or  the  expectation  of  a  tax,  on 
the  production  of,  or  bringing  into  use  of,  similar 
or  rival  things.  If  it  falls  also  on  all  rival  things, 
and  the  supply  of  them  is  not  absolutely  fixed,  its 
incidence  will  be  gradually  transferred  to  the  con- 
sumers. .  .  .  For  a  shorter  period  in  which  the 
tax  falls  mainly  on  the  owners,  the  income  may  be 
regarded  as  more  or  less  of  the  nature  of  rent."'  ^ 
1  Bk.  V,  Ch.  VIII,  par.  2. 


344       THE  ECONOMICS   OF  DISTRIBUTION, 

Under  the  class  "  quasi-rent "  come  the  earnings 
of  improvements  of  land,i  buildings,  machinery, 
etc. ,2  nearly  all  the  profits  of  business  institutions,^ 
and  in  one  passage  it  is  suggested  that  all  "  skill, 
material  capital,  and  business  connections"  when 
and  in  so  far  as  they  are  specialised,  "  cease  to 
exert  a  direct  influence  on  the  value  of  the  prod- 
ucts due  to  them;  and,  on  the  other  hand,  the 
value  of  these  products  .  .  .  determines  the  in- 
come which  can  be  derived  from  these  factors,  i.e. 
it  determines  what  we  have  called  their  quasi- 
rent."* 

§  12.  Now  Professor  Marshall  does  not  explic- 
itly discuss  this  theory  of  Quasi-rents  in  relation 
to  taxation,  though  a  passage  previously  quoted 
seems  to  signify  that  they  are  taxable.  But  Mr. 
Cunningham,  in  a  discussion  of  these  quasi-rents, 
considers  that  not  merely  are  they  directly  amen- 
able to  taxation,  but  that  a  tax  upon  products 
into  which  they  enter  will  lie  upon  them.  Ac- 
cording to  him,  the  profit  upon  capital  that  is 
"  irrevocably  fixed  "  is  "  of  the  nature  of  rent," 
and  he  concludes  by  saying,  "  It  follows  from 
what  has  gone  before  that  a  tax  on  production 
will  affect  price  in  so  far  as  it  is  not  paid  out  of 
that  part  of  price  which  is  of  tlie  nature  of  rent. 
And  whenever  a  tax  is  laid  upon  production, 
whenever  it  can  come  out  of  rent,  it  will  do  so."  ^ 

1  pp.  605,  459.  2  p.  670.  »  p.  659.  *  p.  655. 

^  Economic  Journal,  March,  1892. 


THE  THEORY  OF  SUE  PLUS    VALUE.       345 

Now  it  is  certainly  true  that  forms  of  capital 
which  are  "irrevocably  fixed"  are  in  the  first 
instance  liable,  like  rent  of  land,  to  bear  a  specific 
or  an  ad  valorem  tax  upon  the  products  to  which 
they  contribute.  But  it  by  no  means  follows  that 
they  cannot  recoup  themselves  by  causing  a  rise 
of  prices.  Take  the  case  of  the  interest  on  capital 
sunk  in  houses  ;  houses  already  built  would  not 
be  withdrawn  from  supply  if  the  interest  upon 
the  sunk  capital  fell  toward  zero,  but  it  is  equally 
certain  that  a  tax  upon  houses  could  not  and 
would  not  be  borne  by  this  capital.  For  there  is 
a  constant  flow  of  fluid  capital  toward  houses  so 
long  as  this  capital  is  able  to  earn  normal  interest, 
which  flow  would  be  checked  ^  by  a  tax  upon  the 
capital  already  "  irrevocably  appropriated  "  in  the 
form  of  houses.  In  one  passage  Mr.  Cunningham 
does  seem  to  admit  that  the  taxation  of  quasi-rents 
might  affect  price  and  production,  but  he  urges 
that  it  would  do  so  "very  slowly  after  a  time." 
Now  this  is  not  correct ;  in  any  trade  open  to 
investment  and  vitally  sustained  by  a  flow  of 
capital  from  without,  the  effect  of  taxing  the 
quasi-rents  of  fixed  forms  of  capital  would  be 
rapid  and  immediate.  It  is  only  when  such  "  ir- 
revocably appropriated  "  capital  enjoys  a  power  of 

1  This  check  might  operate  either  by  a  restriction  of  saving 
in  case  the  tax  reduced  the  rate  of  interest  below  that  required 
by  the  marginal  saver,  or  it  might  divert  new  capital  from 
building  Into  other  forms  of  Investment. 


346        THE  ECONOMICS   OF  DISTRIBUTION. 

monopoly,  derived  from  checking  the  flow  of  out- 
side capital,  that  the  profits  on  fixed  capital  will 
be  unable  to  resist  taxation  on  production.  If 
the  breweries  of  a  district  have  a  corner  upon  the 
supply  of  public  houses,  so  that  interests  on  fixed 
capital  in  brewing  are  2  %  higher  than  normal  out- 
side interests,  that  2  %  is  indeed  amenable  to  taxa- 
tion, but  it  is  so  amenable,  not  because  it  takes 
the  form  of  "  irrevocably  appropriated  capital," 
but  because  the  interest  of  such  capital  enjoys 
a  power  of  restricting  the  inflow  of  outside  capital 
and  so  of  earning  a  special  rate  of  interest.  This 
special  interest  is  what  I  term  "  a  forced  gain  or 
scarcity  rent."  It  may  be  included  in  the  quasi- 
rent  of  Professor  Marshall,  but  it  differs  vitally 
from  the  ordinary  interest  on  fixed  capital  in 
being  unable  to  resist  taxation  by  raising  prices. 
In  the  supposed  case,  a  tax  upon  beer  would  fall 
upon  the  2%  excess  interest  and  could  not  be 
recouped  by  raising  prices  ;  it  could  not  fall  upon 
any  further  part  of  the  interest  without  reducing 
brewing  profit  below  the  normal  rate  and  prevent- 
ing the  fresh  influx  of  capital  required  to  sustain 
a  growing  trade,  or  even  to  maintain  a  deprecia- 
tion fund. 

The  mere  fact,  then,  that  capital  or  labour  is 
specialised  and  cannot  be  withdrawn  does  not  en- 
title us  to  regard  the  earnings  of  such  specialised 
factors  as  a  surplus,  so  long  as  the  industry  is 
open  to  fresli  investments  of  capital  and  laboui*. 


THE  THEORY  OF  SURPLUS    VALUE.       347 

A  tax  will  not  lie  upon  these  specialised  forms, 
but  will  be  transferred  to  the  consumer  by  en- 
hanced prices  to  be  bore  ultimately  by  such  "  con- 
sumers "  only  as  enjoy  some  unearned  elements  of 
income.  Only  in  cases  where  some  natural  or  * 
economic  power  restricts  the  inflow  of  capital 
or  labour  will  the  earnings  be  rightly  regarded 
as  a  surplus  and  liable  to  bear  taxation ;  and  in 
such  a  case  the  tax,  so  far  as  it  falls  upon  interests 
or  wages  which  are  results  of  monopoly,  and  are 
in  excess  of  "  competition  rates,"  will  not  be  con- 
fined to  the  capital  which  is  "specialised."  In  a 
word,  the  specialisation  of  capital  or  labour  is  not 
really  a  condition  which  assimilates  its  earnings 
to  rent. 

§  13.  These  quasi-rents,  then,  in  so  far  as  they 
are  rents  at  all,  are  monopoly  or  scarcity  rents 
and  are  liable  to  taxation.  They  also  enter  into 
prices,  for  we  have  seen  that  wherever  a  scarcity 
rent  exists,  the  marginal  portion  of  supply  is  able 
to  obtain  it,  and  it  will  figure  in  supply  prices. 
Professor  Marshall  indeed  denies  that  they  enter 
into  price,  but  when  the  marginal  labourer  in  a 
class  of  labour  or  the  marginal  mill  in  a  particular 
industry  obtains  a  higher  wage  or  a  higher  interest 
than  "  free  competition  "  would  assign,  that  mar- 
ginal wage  or  interest  must  figure  in  expenses  of 
production  and  in  price.  It  can  only  be  excluded 
by  the  fallacious  "dosing"  application  of  tlie  Law 
of  Diminishino-  Returns. 


348       TEE  ECONOMICS   OF  DISTRIBUTION. 

Professor  Marshall  himself  illustrates  a  "  quasi- 
rent  "  of  labour  by  the  high  wages  miners  drew  in 
1873.  Now  it  would  scarcely  be  possible  for  him 
to  affirm  that  the  high  piece  wages  then  paid  did 
not  "  enter  into "  the  price  of  a  ton  of  coal,  for 
every  ton  of  coal  paid  this  piece  wage.  If  it  be 
admitted  that  the  quasi-rent  here  "  enters  into  " 
the  price  of  coal,  it  may  be  contended  that  it  does 
not  help  to  determine  the  price  of  coal,  but  con- 
sists in  a  surplus  which  remains  after  the  neces- 
sary "expenses  of  production  "  are  defrayed  from 
the  price.  But  even  here  the  denial  that  the 
quasi-rent  helps  to  determine  the  price  is  a  mere 
verbal  quibble.  For  the  quasi-rent  is  a  direct 
measure  of  the  pressure  of  scarcity,  which  is  as 
much,  and  in  the  same  sense,  a  determinant  of 
value  and  of  price  as  the  utility  measured  by 
demand.  The  quasi-rent  is  under  the  circum- 
stances a  necessary  payment  of  marginal  labour, 
it  is  not  a  mere  surplus  in  the  sense  that  it  takes 
what  remains  after  expenses  are  paid  out  of  price, 
for  that  implies  that  price  is  determined  exclu- 
sively from  the  demand  side,  which,  as  we  have 
already  seen,  is  not  true,  even  of  the  closest  mo- 
nopolies. The  quasi-rent  of  the  miner  not  only 
enters  price,  but  helps  to  determine  price.  It  is 
true  that  it  is  also  determined  in  its  amount  by 
price,  but  this  only  means  that  it  is  one  of  a 
number  of  mutually  determinant  factors  of  price. 

If,   however,   the    quasi-rent    of   miners   enters 


THE  THEORY  OF  SURPLUS   VALUE.       349 

price  and  helps  to  determine  price,  the  same  is 
true  of  every  other  quasi-rent  of  labour,  capital, 
or  ability.  It  is  only  differential  rents,  whether 
"  true  rents "  or  quasi-rents,  which  do  not  enter 
into  or  determine  price,  because  they  form  no  part 
of  the  expenses  of  the  marginal  supply. 

Such,  then,  of  these  quasi-rents  as  deserve  to 
have  the  term  "  rent "  applied  to  them  should 
receive  it  without  the  timid  justification  of  quasi. 
They  are  to  all  intents  as  much  true  rents  as  the 
scarcity  rent  of  land,  entering  price  as  an  addition 
to  marginal  expenses  and  being  unable  to  resist 
taxation. 

§  14.  We  have  seen  that  elements  of  forced 
gain  marking  superiority  of  bargaining  power 
arise  in  all  the  processes  of  exchange,  and  that 
an  accurate  analysis  of  the  payments  for  finished 
commodities  would  disclose  a  large  number  of 
such  "  gains  "  payable  to  owners  of  factors  of  pro- 
duction at  various  stages.  Our  investigation  of 
the  markets  for  the  use  of  the  several  factors 
indicates  that,  while  any  of  these  factors  may 
assume  this  position  of  superiority  of  bargaining, 
there  is  no  warrant  for  supposing  it  to  be  equally 
distributed  among  them,  even  in  the  long  run. 

A  closer  regard  to  the  actual  mechanism  of 
modern  industry  seems  to  indicate  that  an  increas- 
ing proportion  of  this  power  to  take  "  forced " 
gains  adheres  to  the  class  called  entrepreneurs.,  or 
undertakers,  and    is   included    under    the    vague 


350       THE  ECONOMICS   OF  DISTRIBUTION. 

title  of  profits.  The  undertaker  is  sometimes  the 
owner  of  one  of  the  factors  of  productive  capital 
or  business  capacity,  or  both,  who  buys  the  use 
of  the  other  factors,  and,  organising  them  for 
productive  pui'poses,  is  able  to  sell  the  products 
upon  terms  which  are  highly  "profitable."  These 
profits,  in  so  far  as  they  exceed  necessary  interest 
and  necessary  wages  of  management,  consist  of 
*'  forced  gains,"  not  necessarily  extracted  entirely 
out  of  bargains  with  labourers,  but  partly  perhaps 
by  bargains  with  owners  of  capital,  and  partly  by 
restriction  of  free  competition  in  the  markets  in 
which  he  disposes  of  the  products. 

The  typical  form  of  private  business  to-day  is 
one  in  which  the  undertaker  buys  in  the  cheapest 
market  each  of  the  factors  of  labour,  capital,  and 
land  which  he  requires,  and  organising  their  uses 
for  production,  sells  the  product  in  the  dearest 
market  he  can  command.  Our  analysis  of  the 
relation  of  buyers  and  sellers  indicated  that 
the  buyer  was  in  modern  industry  normally 
the  stronger  bargainer,  so  that  the  undertaker 
may  well  exert  a  power  to  take  "  forced  gains  "  in 
his  bargains  for  the  use  of  labour  and  capital.  The 
real  crux  lies  in  the  question,  "Can  he  retain  for 
himself  these  gains  when  he  assumes  the  position 
of  seller  in  disposing  of  his  products  ?  "  Where 
competition  is  said  to  be  free,  he  cannot,  and  must 
hand  over  to  consumers  such  portions  of  his 
"  forced  gains "  as  are  not   swallowed  up  in  ex- 


THE   THEORY  OF  SURPLUS   VALUE.       351 

penses  of  competition.  He  can  only  hold  these 
"  forced  gains "  by  restricting  freedom  of  compe- 
tition in  markets  where  he  is  seller.  Hence, 
everywhere  he  is  devoting  his  energies  to  one  of 
two  policies.  Arranging  price-lists  by  agreement 
with  competitors,  entering  into  closer  agreements 
with  these  competitors,  and  eventually  organising 
alliances,  syndicates,  or  trusts,  he  labours  to 
strengthen  the  bargaining  power  of  his  "  trade  " 
in  these  dealings  with  middlemen  or  consumers. 
Or  else  he  strives,  by  striking  out  some  slight 
novelty  in  goods  or  by  securing  a  supremacy  over 
a  particular  part  of  the  market,  to  be  able  to 
evade  the  superior  bargaining  power  which  nor- 
mally belongs  to  the  buyer. 

His  success  in  achieving  these  results  is  the 
dominant  feature  of  modern  industry  so  far  as  the 
distribution  of  wealth  is  concerned.  There  is 
good  reason  to  believe  that  an  increasing  propor- 
tion of  "  forced  gains "  or  "  unearned  income  " 
continually  assumes  the  form  of  the  business 
profits  of  undertakers. 

Even  where  formally  it  is  capital  that  takes  the 
initiative,  as  where  a  number  of  capitalists  pool 
their  capital  and  form  a  joint-stock  company,  capi- 
tal buying  the  use  of  labour  and  law  and  manage- 
ment, a  closer  scrutiny  will  generally  disclose  the 
fact  that  the  real  gains  of  such  an  enterprise  are 
absorbed,  often  by  anticipation,  by  one  or  two 
business   men    wlio   as    iinanciers,   promoters,    or 


352       THE  ECONOMICS  OF  DISTRIBUTION. 

managing  directors,  have  organised  the  business 
in  their  own  interests. 

The  recognition  of  these  "  forced  gains  "  or  sur- 
plus elements  in  price  involves  important  conse- 
quences in  considering  methods  of  social  reform. 

§  15.  If  price  contains  no  surplus  beyond  neces- 
sary payment  of  money  costs,  the  arguments,  by 
which  not  merely  "  old  "  economists,  but  so  mod- 
ern an  economist  as  Jevons,  proved  the  futility 
of  trade-union  organisation  in  seeking  to  achieve 
a  general  rise  of  wages,  would  be  valid.  If  the 
profits  of  the  marginal  supply  of  capital  are  kept 
at  a  minimum  in  all  classes  of  investment,  it  will 
be  evident  that  a  rise  of  wages  (unless  attended 
by  a  corresponding  increase  of  efficiency  of  la- 
bour) would  be  impossible,  and  any  attempt  to 
extort  such  a  rise  would  be  injurious.  A  simi- 
lar condemnation  must  be  passed  upon  the  eight 
hours'  movement,  or  upon  any  other  progressive 
movements  which  would  raise  the  wage  bill.  The 
portion  of  the  real  income  of  the  nation  which 
went  as  differential  rents  to  owners  of  land  or 
capital  or  ability,  could  not  be  touched  by  such 
a  policy.  In  other  words,  differential  rents  do 
not  constitute  a  surplus  value.  But  marginal 
rents,  which  enter  into  price,  do  constitute  such 
a  surplus. 

We  have  seen  that,  if  a  single  business  in  a 
trade,  owing  to  exceptional  advantages,  is  earning 
a  higher  rate  of  profits  tlian  others,  it  is  not  pos- 


THE   THEORY  OF  SURPLUS   VALUE.        353 

sible,  under  normal  conditions,  for  the  employees 
to  take  this  profit  in  higher  wages ;  if  by  special 
organisation  of  a  group  it  were  possible  to  take 
the  whole  or  part  of  it,  it  would  only  pass  from 
being  a  differential  rent  of  capital  into  a  differ- 
ential rent  of  labour,  i.e.  a  certain  group  of 
workers  would  have  established  a  sectional  mo- 
nopoly in  a  labour-market.  If,  on  the  other  hand, 
a  whole  trade  were  earning  a  higher  profit  than 
was  necessary  to  keep  the  required  capital  in  the 
trade,  a  surplus  exists,  which  can  raise  the  price 
of  labour  for  a  whole  market,  provided  labour  is 
sufficiently  well  organised  to  take  it.  If  it  can  be 
shown  that  not  merely  do  certain  trades  rise  for 
brief  seasons  into  the  condition  of  earning  surplus 
profit,  but  that  other  trades,  by  reason  of  special 
limitations  upon  the, field  of  investment,  are  per- 
manently in  that  condition,  the  existence  of  a 
large  element  of  surplus  profit  gives  to  the  labour 
movement  that  firm  economic  basis  of  support 
which  otherwise  is  lacking. 

§  16.  Karl  Marx  was  right  in  his  insistence 
upon  the  fundamental  importance  of  recognising 
the  idea  of  surplus  value.  He  was  wrong  in  re- 
garding the  surplus  value  as  exclusively  the  pro- 
duct of  labour-power  taken  by  capital  in  the 
process  of  bargaining  for  the  sale  of  labour- 
power.  He  failed  to  explain  why  labour,  alone 
of  the  factors,  should  be  conceived  as  making  all 
the  "  value  "  of  material  marketable  goods.     He 


354        THE  ECONOMICS    OF  DISTRIBUTION. 

failed  also  to  explain  what  the  nature  of  the  power 
was  by  which  capital  took  the  surplus  value  made 
by  labour ;  and,  finally,  he  failed  to  show  how  any 
individual  capitalist  who  took  it  was  not  compelled 
to  relinquish  it  under  the  stress  of  competition 
with  his  fellow-capitalists. 

The  surplus  value  here  described  issues,  not 
merely  from  one  class  of  bargains  (between  capi- 
tal and  labour),  but  from  every  class  ;  it  represents 
the  economic  might  of  the  stronger  in  every  mar- 
ket. The  true  economic  motive  of  the  organisa- 
tion alike  of  labour  and  of  capital  is  to  establish 
such  a  power  of  bargain  at  some  point  or  other  in 
the  field  of  industry  as  to  obtain  some  of  this  sur- 
plus. Capital,  by  various  processes,  limits  free 
competition ;  price-lists  and  other  trade  agree- 
ments regarding  prices  and  wage-rates,  corners, 
and  other  temporary  coups,  syndicates,  amalgama- 
tions, trusts,  are  all  endeavours  to  enable  the  capi- 
tal in  a  given  market  to  obtain  a  rate  of  profit 
above  the  necessary  minimum,  by  raising  prices, 
reducing  wages,  or  both.  So  far  as  capital  suc- 
ceeds, these  higher  profits  are  represented  in 
market-prices  which  exceed  the  economically 
necessary  money-costs  of  production. 

The  organisation  of  labour  must  also  be  con- 
sidered to  be  directed,  in  the  main,  by  a  similar 
motive.  So  far  as  trade  unionism  is  confined  to 
protecting  a  class  of  labour  against  specially  in- 
jurious conditions  of  low  wages,  irregular  employ- 


THE   THEORY   OF  SURPLUS    VALUE.  355 

ment,  and  other  risks  ini})osed  by  the  greed  or 
carelessness  of  employers,  and  in  thus  securing 
a  bare  maintenance  for  labour,  we  are  entitled  to 
discriminate  trade  unionism  from  organisation  of 
capital.  But  trade  organisations  in  most  skilled 
trades  are  evidently  devoted,  not  to  a  merely  pro- 
tective policy,  but  to  a  strengthening  of  their  capac- 
ity for  bargains  by  restricting  competition  in  the 
labour-market,  so  that  they  may  obtain  in  higher 
wages  or  increased  leisure  a  surplus  corresponding 
in  nature  to  the  higher  profits  of  capital. 

In  every  process  of  production  where  capital, 
labour,  and  land  are  employed,  one  or  other, 
whether  by  organised  contrivance  of  its  owners, 
or  else  by  what  may  be  termed  accident,  is  apt  to 
be  relatively  short  in  supply  :  in  such  case  the 
whole  supply  of  this  factor  will  take  a  price 
containing  a  "surplus"  element.^  Where  many 
different  sorts  of  capital  or  labour  or  land  are 
required  to  contribute  directly  or  indirectly  to  a 
given  process,  a  number  of  these  elements  of 
surplus  will  emerge,  attached  sometimes  to  one, 
sometimes  to  another  factor.  So  if  we  followed 
the  raw  material  of  any  commodity  from  its 
earliest  extractive  stages  to  the  final  form  it 
received  as  it  passed  over  the  retail  counter,  we 
should  find  it  gathering,  not  only  "  costs  "  of  pro- 

1  I.e.  the  final  seller  in  the  market  for  the  use  of  this  factor 
of  production  will  be  stronger  than  the  fuial  buyer,  and  will 
extract  a  large  element  of  "  forced  gain." 


356       THE  ECONOMICS   OF  DISTRIBUTION. 

duction,  but  surplus  elements  at  various  stages 
of  its  advance,  the  final  price  of  the  commodity 
containing  the  aggregate  of  these  costs  and  sur- 
pluses. 

The  price  of  any  ordinary  material  commodity 
of  a  complex  order  will  probably  contain  scores  of 
these  elements  derived  from  the  component  prices 
of  the  productive  goods  and  of  portions  of  the 
services  of  land,  labour,  and  capital,  which  have 
contributed  to  the  final  result. 

In  any  given  condition  of  industry,  land,  labour, 
and  capital  will  probably  all  share  in  this  surplus, 
but  in  very  different  proportions.  Our  general 
analyses  of  the  bargaining  powers  of  owners  of 
land  and  of  many  kinds  of  capital  indicate  that 
in  the  bargains  for  the  use  of  these  factors  their 
owners  will  normally  occupy  the  stronger  position, 
whereas  in  the  bargains  for  the  sale  of  labour- 
power,  the  sellers  (save  in  special  cases  where 
they  are  aided  by  monopoly  of  skill  or  economic 
opportunity)  will  be  weaker  than  the  buyers.  If 
the  large  portion  of  surplus  which  passes  to  the 
commercial  entrepreneur  and  the  financial  classes 
be  regarded  as  wages  of  management  rather  than 
as  interest  upon  the  capital  which  they  operate, 
these  grades  of  skilled  labour  must  be  regarded 
as  possessed  of  a  monopoly  of  business  opportuni- 
ties which  assi<?ns  liisfh  marg'inal  rents  of  labour 

o  o  o 

to  the  work  they  undertake. 

The  fact  that  among  these  entrepreneur  classes, 


THE   THEORY  OF  SURPLUS    VALUE.  357 

as  also  among  the  professional  classes,  some  indi- 
viduals fail  to  make  a  living,  while  among  those 
who  succeed  there  is  the  widest  variety  of  success, 
must  not  blind  us  to  the  inequality  of  economic 
and  educational  opportunities  which  secures  for 
these  and  other  forms  of  skilled  work  marginal 
rates  of  remuneration  that  measure  the  strength 
of  the  protection  which  is  applied  to  them. 

§  17.  Surplus  value,  then,  is  not  something  which 
emerges  in  the  dealings  of  capital  with  labour  or 
of  land  with  labour;  it  emerges  in  ever}^  competi- 
tive bargain  and  adheres  to  the  stronger  bar- 
gainer; it  is  only  because  in  modern  industry  the 
owner  of  capital,  land,  or  business  capacity  is  nor- 
mally found  to  be  the  stronger  bargainer,  that  he 
obtains  most  of  the  surplus.  Labour,  even  manual 
labour  in  certain  markets  and  at  certain  times, 
shares  this  surplus,  takes  in  wages  what  is  not 
essential  to  the  maintenance  of  labour-power. 
The  fact  that  the  labourer  gets  so  little  as  com- 
pared with  the  capitalist,  landowner,  and  entre- 
preneur^ ought  not  to  lead  us  to  adopt  a  false  or 
one-sided  theory  of  the  origin  and  nature  of  sur- 
plus value.  The  amount  and  the  proportion  of 
the  surplus  which  goes  to  the  owners  of  the  sev- 
eral factors  will  be  determined  by  two  general 
conditions  closely  related  to  one  another:  (1)  the 
character  of  consumption;  (2)  the  growth  of  in- 
dustrial arts  in  relation  to  natural  conditions  of 
supply.     It  is  needless  here  to  rehearse  the  chief 


358       THE  ECONOMICS   OF  DISTRIBUTION. 

laws  that  govern  these  forces.  It  must  suffice 
briefly  to  summarise  the  influence  which  these 
forces  exercise  upon  distribution  of  the  surplus. 

(1)  In  a  community  where  a  rapid  growth  of 
population,  or  a  low  order  of  individual  culture, 
causes  a  larger  increase  of  effective  demand  for 
common  articles  of  food  and  other  material  goods 
than  for  intellectual,  artistic,  and,  in  general,  more 
qualitative  goods,  the  owners  of  sources  of  raw 
materials  and  the  organisers  of  manufacture  and 
of  transport  machinery  will  find  the  requisites 
they  own  to  be  ever  in  larger  demand,  and  the 
proportion  of  surplus  or  "  marginal  rents  "  which 
accrues  to  them  will  be  larger.  Whereas,  in  a 
community  where  the  demand  for  large  masses  of 
material  goods  was  subordinated  to  a  growing 
demand  for  highly  qualitative  goods,  either  mate- 
rial or  non-material  in  character,  the  demand  for 
land,  machinery,  and  capital  in  general  would  be 
reduced,  the  demand  for  skilled  manual  and  men- 
tal labour  increased,  and  the  surplus  would  tend 
to  be  distributed  in  accordance  with  the  new 
conditions. 

(2)  Changes  in  the  industrial  arts  will  obvi- 
ously affect  distribution  of  the  surplus  by  giving 
a  greater  or  a  less  importance  to  one  or  other  of 
the  factors.  Tlie  application  of  machinery  and 
steam-power  is,  of  course,  a  most  familiar  example 
of  a  substitution  of  capital  for  labour  in  the  pro- 
duction of  a  given  quantity  of  many  classes  of 


THE  THEORY  OF  SURPLUS   VALUE.  359 

goods.  But,  as  we  have  seen,  the  Law  of  Substi- 
tution has  countless  applications;  new  materials, 
new  sources  of  supply  of  old  materials,  the  open- 
ing of  new  fields  of  cheap  labour,  the  training  of 
large  quantities  of  skilled  labour,  new  processes 
or  methods  of  industrial  organisation,  —  all  these 
familiar  movements  change  the  balance  of  power 
in  bargaining  among  the  different  classes  of  own- 
ers of  capital  and  labour- power  who  contribute  to 
the  production  of  a  commodity,  and  so  affect  the 
distribution  of  the  surplus. 

§  18.  We  may  briefly  sum  up  our  reasoning  as 
follows:  Distribution  consists  in,  or  is  conducted 
by,  the  process  of  fixing  market-prices,  the  price 
of  goods  in  the  various  stages  of  production,  and 
the  price  of  the  use  of  the  various  forms  of  land, 
capital,  and  labour,  which  are  serviceable  in  pro- 
duction. The  sales  of  goods,  of  land-use,  capital- 
use,  or  labour-power  in  the  various  markets,  are 
conducted  by  a  process  of  bargains  which  does 
not  even  tend  to  an  equal  division  between  each 
pair  of  bargainers  of  the  gain  of  the  bargaining, 
being  determined  in  part  by  the  superior  economic 
strength  or  cunning  of  the  marginal  buyer  or 
seller,  in  part  by  the  differential  estimates  of  the 
several  buyers  or  sellers  as  measured  from  the 
margin,  which  estimates  are  themselves  referable 
to  a  complex  of  unequal  needs  and  economic 
opportunities  in  the  various  bargainers  on  either 
side. 


360        THE  ECONOMICS   OF  DISTRIBUTION. 

In  a  very  large  proportion  of  these  bargains  one 
side  is  notoriously  the  stronger,  forcing  a  sale  upon 
conditions  which  give  to  its  members  almost  the 
whole  gain  of  the  bargain,  leaving  to  the  weaker 
only  a  minimum  inducement.  So  far  from  com- 
petition being  free,  it  is  fettered  and  impeded 
everywhere  by  the  growth  of  innumerable  forms 
and  degrees  of  monopolies  and  forced  gains.  The 
theory  that  the  enlightened  self-interest  of  pro- 
ducers keeps  down  normal  prices  to  the  bare 
expenses  of  production,  and  that  in  consequence 
the  whole  gain  of  modern  industrial  improvements 
filters  down  to  the  community  in  their  capac- 
ity of  consumers,  is  seen  to  be  quite  unwarranted. 
Indeed,  the  whole  notion  of  the  consumer  as  re- 
siduary legatee  is  as  groundless  in  theory  as  in 
practice.  There  exists  no  such  fourth  party  in 
the  working  of  distribution  :  the  various  owners 
of  land,  capital,  and  labour  take  each  according 
to  his  strength.  Thus  emerges  the  true  surplus 
value,  derived  not  from  some  vague,  unintelligible 
idea  of  tyranny,  but  from  the  various  hindrances 
to  perfect  equality  of  bargaining-power  in  the 
owners  of  the  various  factors  of  production  and 
the  consequent  establishment  of  diiferent  forms 
and  pressures  of  economic  force. 

The  recognition  of  this  force  explains  the 
opposing  theories  and  policies  of  economics.  For 
the  imperfection  of  equality  of  competition  may 
be  met  and  overcome  by  securing  equality  of  eco- 


I 


THE   THEORY  OF  SURPLUS   VALUE.  361 

nouiic  opportunity  for  individuals.  This  is  the 
idea  of  laissez-faire  economists,  though  they  have 
commonly,  or  perhaps  universally,  failed  to  pro- 
vide or  even  to  advocate  equality  of  opportunity 
for  obtaining  possession  or  use  of  land  and  capital. 
Or  else,  recognising  the  difficulty  or  the  impossi- 
bility of  maintaining  perfect  equality  in  all  depart- 
ments of  economic  activity  by  the  free  play  of 
individual  interests,  we  may  allow  such  inequality 
to  issue  in  "  forced  gains,"  and  afterward  attempt 
to  redress  this  inequality  by  taxation.  If  this 
method  of  redress  prove  too  difficult  or  too  uncer- 
tain, economic  progress  will  demand  the  substi- 
tution of  a  public  monopoly  for  those  private 
monopolies  which  inequality  of  economic  oppor- 
tunity has  founded,  and  to  which  inequality  of 
bargaining  assigns  "forced  gains." 


UNIVERSITY  OF  CALIFORNIA  AT  LOS  A^GEl  FS 


UNIVERSITY  OF  CALIFORNIA  LIBRARY 

Los  Angeles 

This  book  is  DUE  on  the  last  date  stamped  below. 


WEEKS  ocp  0  c  iSli 


UNIVERSITY  OF  CALIFORNU 

AT 

L06  ANGELES 

UBRARY 


UC  SOUTHERN  REGIONAL  LIBRARY  FACILITY 


AA    001  157  521    4 


